UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-51405

FEDERAL HOME LOAN BANK OF DALLAS

(Exact name of registrant as specified in its charter)

Federally chartered corporation (State or other jurisdiction of incorporation or organization)	71-6013989 (I.R.S. Employer Identification Number)
8500 Freeport Parkway South, Suite 600 Irving, TX (Address of principal executive offices)	75063-2547 (Zip code)

(214) 441-8500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and [2] has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (17 C.F.R. §232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o	Accelerated filer o	Non-accelerated filer þ	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At July 31, 2012, the registrant had outstanding 11,181,974 shares of its Class B Capital Stock, $100 par value per share.

FEDERAL HOME LOAN BANK OF DALLAS

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	1
Statements of Condition as of June 30, 2012 and December 31, 2011	1
Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011	2
Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011	3
Statements of Capital for the Six Months Ended June 30, 2012 and 2011	4
Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011	5
Notes to Interim Unaudited Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Forward-Looking Information	37
Overview	37
Selected Financial Data	42
Legislative and Regulatory Developments	43
Financial Condition	45
Results of Operations	62
Critical Accounting Policies and Estimates	71
Liquidity and Capital Resources	71
Recently Issued Accounting Guidance	73
Item 3. Quantitative and Qualitative Disclosures About Market Risk	73
Item 4. Controls and Procedures	76
PART II. OTHER INFORMATION
Item 6. Exhibits	76
Signatures	77
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CONDITION

(Unaudited; in thousands, except share data)

	June 30, 2012			December 31, 2011
ASSETS
Cash and due from banks	$	1,447,776		$	1,152,467
Interest-bearing deposits	308			223
Securities purchased under agreements to resell	1,000,000			500,000
Federal funds sold	1,573,000			1,645,000
Trading securities (Note 12)	6,976			6,034
Available-for-sale securities, including $182,881 and $512,474 of securities pledged as collateral to derivatives counterparties at June 30, 2012 and December 31, 2011, respectively (Notes 3 and 12)	5,767,745			4,927,697
Held-to-maturity securities (a) (Notes 4 and 12)	5,457,479			6,423,610
Advances (Notes 5 and 6)	19,207,379			18,797,834
Mortgage loans held for portfolio, net of allowance for credit losses of $190 and $192 at June 30, 2012 and December 31, 2011, respectively (Note 6)	140,443			162,645
Loan to other FHLBank (Note 15)	—			35,000
Accrued interest receivable	74,974			72,584
Premises and equipment, net	20,808			22,182
Derivative assets (Notes 9 and 12)	18,758			8,750
Other assets	13,341			15,941
TOTAL ASSETS	$	34,728,987		$	33,769,967
LIABILITIES AND CAPITAL
Deposits
Interest-bearing	$	1,145,306		$	1,521,396
Non-interest bearing	29			29
Total deposits	1,145,335			1,521,425
Consolidated obligations (Note 7)
Discount notes	9,507,659			9,799,010
Bonds	22,049,307			20,070,056
Total consolidated obligations	31,556,966			29,869,066
Mandatorily redeemable capital stock	4,890			14,980
Accrued interest payable	66,579			65,451
Affordable Housing Program (Note 8)	30,484			32,313
Derivative liabilities (Notes 9 and 12)	180,268			531,164
Other liabilities, including $133 and $2,498 of optional advance commitments carried at fair value under the fair value option at June 30, 2012 and December 31, 2011, respectively (Notes 12 and 13)	45,678			30,733
Total liabilities	33,030,200			32,065,132
Commitments and contingencies (Notes 6 and 13)
CAPITAL (Note 10)
Capital stock — Class B putable ($100 par value) issued and outstanding shares: 12,044,070 and 12,557,934 shares at June 30, 2012 and December 31, 2011, respectively	1,204,441			1,255,793
Retained earnings
Unrestricted	523,851			488,739
Restricted	15,273			5,918
Total retained earnings	539,124			494,657
Accumulated other comprehensive income (loss) (Note 16)	(44,778		)	(45,615		)
Total capital	1,698,787			1,704,835
TOTAL LIABILITIES AND CAPITAL	$	34,728,987		$	33,769,967

_____________________________

(a) Fair values: $5,522,105 and $6,482,402 at June 30, 2012 and December 31, 2011, respectively.

The accompanying notes are an integral part of these financial statements.

1

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF INCOME

(Unaudited, in thousands)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
INTEREST INCOME
Advances	$	47,145		$	53,577		$	97,574		$	112,982
Prepayment fees on advances, net	1,624			3,696			3,595			4,962
Interest-bearing deposits	331			50			484			122
Securities purchased under agreements to resell	955			141			1,521			245
Federal funds sold	679			432			1,115			1,637
Available-for-sale securities	7,924			—			15,526			—
Held-to-maturity securities	17,920			20,661			35,872			44,793
Mortgage loans held for portfolio	2,021			2,630			4,208			5,410
Other	1			—			1			6
Total interest income	78,600			81,187			159,896			170,157
INTEREST EXPENSE
Consolidated obligations
Bonds	35,594			43,628			74,568			89,096
Discount notes	2,363			85			3,988			1,329
Deposits	80			53			123			170
Mandatorily redeemable capital stock	5			17			12			35
Other borrowings	1			1			2			1
Total interest expense	38,043			43,784			78,693			90,631
NET INTEREST INCOME	40,557			37,403			81,203			79,526
OTHER INCOME (LOSS)
Total other-than-temporary impairment losses on held-to-maturity securities	(204		)	(5,678		)	(204		)	(5,678		)
Net non-credit impairment losses recognized in other comprehensive income	58			3,334			(156		)	1,956
Credit component of other-than-temporary impairment losses on held-to-maturity securities	(146		)	(2,344		)	(360		)	(3,722		)
Service fees	757			766			1,276			1,336
Net gain (loss) on trading securities	(122		)	45			60			174
Net gains (losses) on derivatives and hedging activities	(39		)	(14,058		)	2,538			(20,573		)
Unrealized gains on other liabilities carried at fair value under the fair value option	1,223			4,994			2,365			4,133
Gains on early extinguishment of debt	—			46			—			415
Letter of credit fees	1,170			1,345			2,399			2,774
Other, net	(193		)	18			(199		)	8
Total other income (loss)	2,650			(9,188		)	8,079			(15,455		)
OTHER EXPENSE
Compensation and benefits	9,929			10,269			21,376			21,854
Other operating expenses	7,186			7,004			13,476			13,698
Finance Agency	578			1,478			1,377			2,623
Office of Finance	505			397			1,079			1,130
Total other expense	18,198			19,148			37,308			39,305
INCOME BEFORE ASSESSMENTS	25,009			9,067			51,974			24,766
Affordable Housing Program	2,502			748			5,199			2,031
REFCORP	—			1,611			—			4,494
Total assessments	2,502			2,359			5,199			6,525
NET INCOME	$	22,507		$	6,708		$	46,775		$	18,241

The accompanying notes are an integral part of these financial statements.

2

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
NET INCOME	$	22,507		$	6,708		$	46,775		$	18,241
OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized losses on available-for-sale securities, net of unrealized gains and losses relating to hedged interest rate risk included in net income	(7,610		)	—			(4,526		)	—
Non-credit portion of other-than-temporary impairment losses on held-to-maturity securities	(195		)	(5,531		)	(195		)	(5,531		)
Reclassification adjustment for non-credit portion of other-than-temporary impairment losses recognized as credit losses in net income	137			2,197			351			3,575
Accretion of non-credit portion of other-than-temporary impairment losses to the carrying value of held-to-maturity securities	2,485			4,397			5,242			8,993
Postretirement benefit plan
Amortization of prior service credit included in net periodic benefit cost	(9		)	(9		)	(18		)	(18		)
Amortization of net actuarial gain included in net periodic benefit cost	(9		)	(6		)	(17		)	(12		)
Total other comprehensive income (loss)	(5,201		)	1,048			837			7,007
TOTAL COMPREHENSIVE INCOME	$	17,306		$	7,756		$	47,612		$	25,248

The accompanying notes are an integral part of these financial statements.

3

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CAPITAL

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(Unaudited, in thousands)

														Accumulated
	Capital Stock Class B - Putable					Retained Earnings								Other Comprehensive			Total
	Shares		Par Value			Unrestricted			Restricted		Total			Income (Loss)			Capital
BALANCE, JANUARY 1, 2012	12,557		$	1,255,793		$	488,739		$	5,918	$	494,657		$	(45,615	)	$	1,704,835
Proceeds from sale of capital stock	3,059		305,920			—			—		—			—			305,920
Repurchase/redemption of capital stock	(3,585	)	(358,560		)	—			—		—			—			(358,560		)
Shares reclassified to mandatorily redeemable capital stock	(9	)	(926		)	—			—		—			—			(926		)
Comprehensive income
Net income	—		—			37,420			9,355		46,775			—			46,775
Other comprehensive income	—		—			—			—		—			837			837
Dividends on capital stock (at 0.375 percent annualized rate)
Cash	—		—			(89		)	—		(89		)	—			(89		)
Mandatorily redeemable capital stock	—		—			(5		)	—		(5		)	—			(5		)
Stock	22		2,214			(2,214		)	—		(2,214		)	—			—
BALANCE, JUNE 30, 2012	12,044		$	1,204,441		$	523,851		$	15,273	$	539,124		$	(44,778	)	$	1,698,787
BALANCE, JANUARY 1, 2011	16,009		$	1,600,909		$	452,205		$	—	$	452,205		$	(62,702	)	$	1,990,412
Proceeds from sale of capital stock	1,833		183,347			—			—		—			—			183,347
Repurchase/redemption of capital stock	(4,412	)	(441,291		)	—			—		—			—			(441,291		)
Shares reclassified to mandatorily redeemable capital stock	(612	)	(61,184		)	—			—		—			—			(61,184		)
Comprehensive income
Net income	—		—			18,241			—		18,241			—			18,241
Other comprehensive income	—		—			—			—		—			7,007			7,007
Dividends on capital stock (at 0.375 percent annualized rate)
Cash	—		—			(90		)	—		(90		)	—			(90		)
Mandatorily redeemable capital stock	—		—			(75		)	—		(75		)	—			(75		)
Stock	28		2,778			(2,778		)	—		(2,778		)	—			—
BALANCE, JUNE 30, 2011	12,846		$	1,284,559		$	467,503		$	—	$	467,503		$	(55,695	)	$	1,696,367

The accompanying notes are an integral part of these financial statements.

4

FEDERAL HOME LOAN BANK OF DALLAS

STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	For the Six Months Ended
	June 30,
	2012			2011
OPERATING ACTIVITIES
Net income	$	46,775		$	18,241
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
Net premiums and discounts on advances, consolidated obligations, investments and mortgage loans	22,119			(35,240		)
Concessions on consolidated obligation bonds	2,306			2,220
Premises, equipment and computer software costs	3,370			3,350
Non-cash interest on mandatorily redeemable capital stock	17			21
Credit component of other-than-temporary impairment losses on held-to-maturity securities	360			3,722
Gains on early extinguishment of debt	—			(415		)
Unrealized gains on other liabilities carried at fair value under the fair value option	(2,365		)	(4,133		)
Net increase in trading securities	(942		)	(818		)
Loss due to change in net fair value adjustment on derivative and hedging activities	47,179			40,043
Decrease (increase) in accrued interest receivable	(2,498		)	5,897
Decrease in other assets	1,631			1,847
Decrease in Affordable Housing Program (AHP) liability	(1,829		)	(4,684		)
Increase in accrued interest payable	1,128			3,120
Decrease in payable to REFCORP	—			(3,982		)
Increase (decrease) in other liabilities	(7,344		)	2,301
Total adjustments	63,132			13,249
Net cash provided by operating activities	109,907			31,490
INVESTING ACTIVITIES
Net increase in interest-bearing deposits, including swap collateral pledged	(527,539		)	(26,302		)
Net increase in securities purchased under agreements to resell	(500,000		)	—
Net decrease in federal funds sold	72,000			1,819,000
Decrease in loan to other FHLBank	35,000			—
Purchases of available-for-sale securities	(775,047		)	—
Proceeds from maturities of long-term held-to-maturity securities	983,589			1,182,792
Principal collected on advances	216,172,324			125,066,626
Advances made	(216,581,856		)	(119,302,910		)
Principal collected on mortgage loans held for portfolio	22,112			22,882
Purchases of premises, equipment and computer software	(1,762		)	(3,379		)
Net cash provided by (used in) investing activities	(1,101,179		)	8,758,709
FINANCING ACTIVITIES
Net increase (decrease) in deposits, including swap collateral held	(375,094		)	430,213
Net payments on derivative contracts with financing elements	(15,187		)	(9,958		)
Net proceeds from issuance of consolidated obligations
Discount notes	163,537,474			113,048,535
Bonds	12,939,158			1,939,769
Proceeds from assumption of debt from other FHLBank	—			167,381
Debt issuance costs	(1,649		)	(706		)
Payments for maturing and retiring consolidated obligations
Discount notes	(163,827,950		)	(115,328,111		)
Bonds	(10,906,405		)	(8,226,328		)
Payment to other FHLBank for assumption of debt	—			(14,738		)
Proceeds from issuance of capital stock	305,920			183,347
Payments for redemption of mandatorily redeemable capital stock	(11,037		)	(52,180		)
Payments for repurchase/redemption of capital stock	(358,560		)	(441,291		)
Cash dividends paid	(89		)	(90		)
Net cash provided by (used in) financing activities	1,286,581			(8,304,157		)
Net increase in cash and cash equivalents	295,309			486,042
Cash and cash equivalents at beginning of the period	1,152,467			1,631,899
Cash and cash equivalents at end of the period	$	1,447,776		$	2,117,941

5

Supplemental Disclosures:
Interest paid	$	85,772	$	94,964
AHP payments, net	$	7,028	$	6,715
REFCORP payments	$	—	$	8,476
Stock dividends issued	$	2,214	$	2,778
Dividends paid through issuance of mandatorily redeemable capital stock	$	5	$	75
Capital stock reclassified to mandatorily redeemable capital stock	$	926	$	61,184

The accompanying notes are an integral part of these financial statements.

6

FEDERAL HOME LOAN BANK OF DALLAS

NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS

Note 1—Basis of Presentation

The accompanying interim financial statements of the Federal Home Loan Bank of Dallas (the “Bank”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions provided by Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The financial statements contain all adjustments that are, in the opinion of management, necessary for a fair statement of the Bank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

The Bank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2011. The interim financial statements presented herein should be read in conjunction with the Bank’s audited financial statements and notes thereto, which are included in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 23, 2012 (the “2011 10-K”). The notes to the interim financial statements update and/or highlight significant changes to the notes included in the 2011 10-K.

The Bank is one of 12 district Federal Home Loan Banks, each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System.” The Office of Finance manages the sale and servicing of the FHLBanks’ consolidated obligations. The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, supervises and regulates the FHLBanks and the Office of Finance.

Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make assumptions and estimates. These assumptions and estimates may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Significant assumptions include those that are used by the Bank in its periodic evaluation of its holdings of non-agency residential mortgage-backed securities for other-than-temporary impairment (“OTTI”). Significant estimates include the valuations of the Bank’s investment securities, as well as its derivative instruments and any associated hedged items. Actual results could differ from these estimates.

Note 2—Recently Issued Accounting Guidance

Reconsideration of Effective Control for Repurchase Agreements. On April 29, 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-03 “Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”), which eliminates from U.S. GAAP the requirement for entities to consider whether a transferor has the ability to repurchase the financial assets in a repurchase agreement. The guidance is intended to focus the assessment of effective control over financial assets on a transferor’s contractual rights and obligations with respect to transferred financial assets and not on whether the transferor has the practical ability to exercise those rights or honor those obligations. In addition to removing the criterion for entities to consider a transferor’s ability to repurchase the financial assets, ASU 2011-03 also removes the collateral maintenance implementation guidance related to that criterion. The guidance is effective prospectively for transactions, or modifications of existing transactions, that occur during or after the first interim or annual reporting period beginning on or after December 15, 2011 (January 1, 2012 for the Bank). Early adoption was not permitted. The adoption of this guidance did not have any impact on the Bank’s results of operations or financial condition.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”). On May 12, 2011, the FASB issued ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which clarifies and, in some cases, amends the existing guidance in U.S. GAAP for measuring fair value and provides for certain additional disclosures regarding fair value measurements. The guidance is intended to result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The guidance is effective for interim and annual reporting periods beginning on or after December 15, 2011 (January 1, 2012 for the Bank) and is to be applied prospectively. Early adoption was not permitted. The adoption of this guidance did not have any impact on the Bank’s results of operations or financial condition. The required additional disclosures are presented in Note 12.

Presentation of Comprehensive Income. On June 16, 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income” ("ASU 2011-05"), which eliminates the option to present components of other comprehensive income as part of the statement of capital and requires, among other things, that all non-owner changes in stockholders’ equity be

7

presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement must present total net income and its components followed consecutively by a second statement that must present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The guidance is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to earnings.

On December 23, 2011, the FASB issued ASU 2011-12 "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05" ("ASU 2011-12"), which defers indefinitely the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. ASU 2011-12 was issued in order to allow the FASB time to reconsider whether it is necessary to require companies to present reclassification adjustments by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. The guidance in ASU 2011-12 did not defer the requirement to report comprehensive income either in a single continuous statement or in two separate but consecutive financial statements.

The guidance in both ASU 2011-05 and ASU 2011-12 is effective for interim and annual reporting periods beginning on or after December 15, 2011 (January 1, 2012 for the Bank) and is to be applied retrospectively. Early adoption was permitted. The Bank adopted this guidance effective January 1, 2012. The adoption of this guidance did not impact the Bank’s results of operations or financial condition.

Disclosures about Offsetting Assets and Liabilities. On December 16, 2011, the FASB issued ASU 2011-11 "Disclosures about Offsetting Assets and Liabilities," which requires enhanced disclosures about financial instruments and derivative instruments that are either offset in the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. This information is intended to enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. The International Accounting Standards Board concurrently issued similar disclosure guidance.

The eligibility criteria for offsetting are different in IFRSs and U.S. GAAP. Unlike IFRSs, U.S. GAAP allows entities the option to present net in their balance sheets derivatives that are subject to a legally enforceable netting arrangement with the same party where rights of set-off are only available in the event of default or bankruptcy. The new disclosure requirements allow investors to better compare financial statements prepared in accordance with IFRSs or U.S. GAAP. The common disclosure requirements also improve transparency in the reporting of how entities mitigate credit risk, including disclosure of related collateral pledged or received.

The guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods (January 1, 2013 for the Bank), and is to be applied retrospectively to all periods presented. The adoption of this guidance may result in increased financial statement footnote disclosures for the Bank, but will not have any impact on the Bank’s results of operations or financial condition.

Asset Classification and Charge-offs. On April 9, 2012, the Finance Agency issued Advisory Bulletin 2012-02, "Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention" ("AB 2012-02"). The guidance establishes a standard and uniform methodology for classifying assets and prescribes the timing of asset charge-offs, excluding investment securities. The guidance in AB 2012-02 is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. AB 2012-02 states that it was effective upon issuance. The FHLBanks are currently assessing the provisions of AB 2012-02 in coordination with the Finance Agency and therefore have not yet determined when they will implement the guidance. The adoption of the accounting guidance in AB 2012-02 is not expected to have a significant impact on the Bank's results of operations or financial condition.

8

Note 3—Available-for-Sale Securities

Major Security Types. Available-for-sale securities as of June 30, 2012 were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Debentures
U.S. government-guaranteed obligations	$	55,767	$	129	$	48	$	55,848
Government-sponsored enterprises	5,253,252		8,843		8,344		5,253,751
Other	458,055		950		859		458,146
Total	$	5,767,074	$	9,922	$	9,251	$	5,767,745

Included in the table above are securities that were purchased but which had not yet settled as of June 30, 2012. The amount due of $24,620,000 is included in other liabilities on the statement of condition.

Available-for-sale securities as of December 31, 2011 were as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Debentures
U.S. government-guaranteed obligations	$	54,708	$	157	$	—	$	54,865
Government-sponsored enterprises	4,643,191		7,971		3,391		4,647,771
Other	224,601		505		45		225,061
Total	$	4,922,500	$	8,633	$	3,436	$	4,927,697

Other debentures are fully secured by U.S. government-guaranteed obligations and the payment of interest on the debentures is guaranteed by an agency of the U.S. government. The amortized cost of the Bank's available-for-sale securities includes hedging adjustments. The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of June 30, 2012. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

	Less than 12 Months					12 Months or More					Total
	Number of Positions	Estimated Fair Value		Gross Unrealized Losses		Number of Positions	Estimated Fair Value		Gross Unrealized Losses		Number of Positions	Estimated Fair Value		Gross Unrealized Losses
Debentures
U.S. government-guaranteed obligations	2	$	24,606	$	48	—	$	—	$	—	2	$	24,606	$	48
Government-sponsored enterprises	102	1,349,176		8,344		—	—		—		102	1,349,176		8,344
Other	21	204,739		859		—	—		—		21	204,739		859
Total	125	$	1,578,521	$	9,251	—	$	—	$	—	125	$	1,578,521	$	9,251

The following table summarizes (in thousands, except number of positions) the available-for-sale securities with unrealized losses as of December 31, 2011. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

	Less than 12 Months					12 Months or More					Total
	Number of Positions	Estimated Fair Value		Gross Unrealized Losses		Number of Positions	Estimated Fair Value		Gross Unrealized Losses		Number of Positions	Estimated Fair Value		Gross Unrealized Losses
Debentures
Government-sponsored enterprises	67	$	1,532,618	$	3,391	—	$	—	$	—	67	$	1,532,618	$	3,391
Other	5	19,703		45		—	—		—		5	19,703		45
Total	72	$	1,552,321	$	3,436	—	$	—	$	—	72	$	1,552,321	$	3,436

9

At June 30, 2012, the gross unrealized losses on the Bank’s available-for-sale securities were $9,251,000. All of the Bank's available-for-sale securities are either guaranteed by the U.S. government, issued by government-sponsored enterprises (“GSEs”), or fully secured by collateral that is guaranteed by the U.S government. As of June 30, 2012, the U.S. government and the issuers of the Bank’s holdings of GSE debentures were rated triple-A by Moody’s Investors Service (“Moody’s”) and Fitch Ratings, Ltd. (“Fitch”) and AA+ by Standard and Poor’s (“S&P”). The Bank's holdings of other debentures were rated Aaa by Moody's and AA+ by S&P at that date; the other debentures are not rated by Fitch. Based upon the U.S. government's guaranty of the payment of principal and interest, the Bank expects that its holdings of U.S. government-guaranteed debentures that were in an unrealized loss position at June 30, 2012 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. In addition, based upon the Bank’s assessment of the creditworthiness of the issuers of the GSE debentures and the credit ratings assigned by each of the nationally recognized statistical rating organizations (“NRSROs”), the Bank expects that its holdings of GSE debentures that were in an unrealized loss position at June 30, 2012 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Further, based on the creditworthiness of the issuer of the Bank's holdings of other debentures, the U.S. government's guaranty of the payment of principal and interest on the collateral securing those debentures, and the guaranty of the payment of interest on the debentures by an agency of the U.S. government, the Bank expects that its holdings of other debentures that were in an unrealized loss position at June 30, 2012 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with the Bank's available-for-sale securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2012.

Redemption Terms. The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at June 30, 2012 and December 31, 2011 are presented below (in thousands).

	June 30, 2012				December 31, 2011
Maturity	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Debentures
Due after one year through five years	$	2,472,982	$	2,478,192	$	568,889	$	570,229
Due after five years through ten years	3,242,350		3,238,136		4,275,148		4,279,140
Due after ten years	51,742		51,417		78,463		78,328
Total	$	5,767,074	$	5,767,745	$	4,922,500	$	4,927,697

Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as available-for-sale at June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012		December 31, 2011
Amortized cost of available-for-sale securities
Fixed-rate	$	5,692,074	$	4,847,500
Variable-rate	75,000		75,000
Total	$	5,767,074	$	4,922,500

At June 30, 2012 and December 31, 2011, all of the Bank's fixed-rate available-for-sale securities were swapped to a variable rate.

10

Note 4—Held-to-Maturity Securities

Major Security Types. Held-to-maturity securities as of June 30, 2012 were as follows (in thousands):

	Amortized Cost		OTTI Recorded in Accumulated Other Comprehensive Income (Loss)		Carrying Value		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses		Estimated Fair Value
Debentures
U.S. government-guaranteed obligations	$	42,048	$	—	$	42,048	$	222	$	220	$	42,050
Mortgage-backed securities
U.S. government-guaranteed obligations	15,062		—		15,062		58		—		15,120
Government-sponsored enterprises	5,171,701		—		5,171,701		89,493		582		5,260,612
Non-agency residential mortgage-backed securities	274,699		46,031		228,668		—		24,345		204,323
	5,461,462		46,031		5,415,431		89,551		24,927		5,480,055
Total	$	5,503,510	$	46,031	$	5,457,479	$	89,773	$	25,147	$	5,522,105

Held-to-maturity securities as of December 31, 2011 were as follows (in thousands):

	Amortized Cost		OTTI Recorded in Accumulated Other Comprehensive Income (Loss)		Carrying Value		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses		Estimated Fair Value
Debentures
U.S. government-guaranteed obligations	$	45,342	$	—	$	45,342	$	290	$	291	$	45,341
Mortgage-backed securities
U.S. government-guaranteed obligations	16,692		—		16,692		40		—		16,732
Government-sponsored enterprises	6,109,080		—		6,109,080		93,138		2,682		6,199,536
Non-agency residential mortgage-backed securities	303,925		51,429		252,496		—		31,703		220,793
	6,429,697		51,429		6,378,268		93,178		34,385		6,437,061
Total	$	6,475,039	$	51,429	$	6,423,610	$	93,468	$	34,676	$	6,482,402

The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of June 30, 2012. The unrealized losses include other-than-temporary impairments recognized in accumulated other comprehensive income (loss) and gross unrecognized holding losses and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

11

	Less than 12 Months					12 Months or More					Total
	Number of Positions	Estimated Fair Value		Gross Unrealized Losses		Number of Positions	Estimated Fair Value		Gross Unrealized Losses		Number of Positions	Estimated Fair Value		Gross Unrealized Losses
Debentures
U.S. government-guaranteed obligations	—	$	—	$	—	2	$	18,697	$	220	2	$	18,697	$	220
Mortgage-backed securities
Government-sponsored enterprises	—	—		—		26	375,346		582		26	375,346		582
Non-agency residential mortgage-backed securities	—	—		—		32	204,323		70,376		32	204,323		70,376
	—	—		—		58	579,669		70,958		58	579,669		70,958
Total	—	$	—	$	—	60	$	598,366	$	71,178	60	$	598,366	$	71,178

The following table summarizes (in thousands, except number of positions) the held-to-maturity securities with unrealized losses as of December 31, 2011. The unrealized losses include other-than-temporary impairments recognized in accumulated other comprehensive income (loss) and gross unrecognized holding losses and are aggregated by major security type and length of time that individual securities have been in a continuous loss position.

	Less than 12 Months					12 Months or More					Total
	Number of Positions	Estimated Fair Value		Gross Unrealized Losses		Number of Positions	Estimated Fair Value		Gross Unrealized Losses		Number of Positions	Estimated Fair Value		Gross Unrealized Losses
Debentures
U.S. government-guaranteed obligations	1	$	9,136	$	174	1	$	10,357	$	117	2	$	19,493	$	291
Mortgage-backed securities
Government-sponsored enterprises	18	423,121		383		42	723,500		2,299		60	1,146,621		2,682
Non-agency residential mortgage-backed securities	—	—		—		34	220,793		83,132		34	220,793		83,132
	18	423,121		383		76	944,293		85,431		94	1,367,414		85,814
Total	19	$	432,257	$	557	77	$	954,650	$	85,548	96	$	1,386,907	$	86,105

At June 30, 2012, the gross unrealized losses on the Bank’s held-to-maturity securities were $71,178,000, of which $70,376,000 was attributable to its holdings of non-agency (i.e., private-label) residential mortgage-backed securities and $802,000 was attributable to securities that are either guaranteed by the U.S. government or issued and guaranteed by GSEs. As of June 30, 2012, the U.S. government and the issuers of the Bank’s holdings of GSE mortgage-backed securities ("MBS") were rated triple-A by Moody’s and Fitch and AA+ by S&P.

Based upon the Bank’s assessment of the strength of the government guarantees of the debentures held by the Bank, the credit ratings assigned by the NRSROs and the strength of the GSEs’ guarantees of the Bank’s holdings of agency MBS, the Bank expects that its holdings of U.S. government-guaranteed debentures and GSE MBS that were in an unrealized loss position at June 30, 2012 would not be settled at an amount less than the Bank’s amortized cost bases in these investments. Because the current market value deficits associated with these securities are not attributable to credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these investments to be other-than-temporarily impaired at June 30, 2012.

The deterioration in the U.S. housing markets that began in 2007, as reflected by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency residential MBS (“RMBS”), has generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. Based on its analysis of the securities in this portfolio, however, the Bank believes that the unrealized losses as of June 30, 2012 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.

Because the ultimate receipt of contractual payments on the Bank’s non-agency RMBS will depend upon the credit and prepayment performance of the underlying loans and the credit enhancements for the senior securities owned by the Bank, the Bank closely monitors these investments in an effort to determine whether the credit enhancement associated with each security is sufficient to protect against potential losses of principal and interest on the underlying mortgage loans. The credit

12

enhancement for each of the Bank’s non-agency RMBS is provided by a senior/subordinate structure, and none of the securities owned by the Bank are insured by third-party bond insurers. More specifically, each of the Bank’s non-agency RMBS represents a single security class within a securitization that has multiple classes of securities. Each security class has a distinct claim on the cash flows from the underlying mortgage loans, with the subordinate securities having a junior claim relative to the more senior securities. The Bank’s non-agency RMBS have a senior claim on the cash flows from the underlying mortgage loans.

To assess whether the entire amortized cost bases of its 32 non-agency RMBS are likely to be recovered, the Bank performed a cash flow analysis for each security as of June 30, 2012 using two third-party models. The first model considers borrower characteristics and the particular attributes of the loans underlying the Bank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (“CBSAs”), which are based upon an assessment of the individual housing markets. (The term “CBSA” refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people.) The Bank’s housing price forecast as of June 30, 2012 assumed current-to-trough home price declines ranging from 0 percent (for those housing markets that management believes have reached their trough) to 6.0 percent. For those markets for which management anticipates further home price declines, such declines were projected to occur over the 3- to 9-month period beginning April 1, 2012. For the vast majority of markets for which further home price declines are anticipated, the declines were projected to range from 1 percent to 4 percent over the 3-month period beginning April 1, 2012. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. Under those recovery paths, home prices were projected to increase as set forth in the table below.

Months	Range of Annualized Rates
1 - 6	0.0% - 2.8%
7 - 18	0.0% - 3.0%
19 - 24	1.0% - 4.0%
25 - 30	2.0% - 4.0%
31 - 42	2.0% - 5.0%
43 - 66	2.0% - 6.0%
Thereafter	2.3% - 5.6%

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balance is reduced to zero.

Based on the results of its cash flow analyses, the Bank determined that it is likely that it will not fully recover the amortized cost bases of two of its non-agency RMBS and, accordingly, these securities were deemed to be other-than-temporarily impaired as of June 30, 2012. Both of these securities had previously been deemed to be other-than-temporarily impaired. The difference between the present value of the cash flows expected to be collected from these two securities and their amortized cost bases (i.e., the credit losses) totaled $146,000 as of June 30, 2012. Because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their remaining amortized cost bases (that is, their previous amortized cost bases less the current-period credit losses), only the amounts related to the credit losses were recognized in earnings. The credit losses associated with one of the previously impaired securities (totaling $137,000) were reclassified from accumulated other comprehensive income (loss) to earnings during the three months ended June 30, 2012 as the estimated fair value of this security was greater than its carrying amount at that date.

In addition to the 2 securities that were determined to be other-than-temporarily impaired at June 30, 2012, 12 other securities were previously deemed to be other-than-temporarily impaired. The following tables set forth additional information for each of the securities that were other-than-temporarily impaired as of June 30, 2012, including those securities that were deemed to be other-than-temporarily impaired in a prior period but which were not further impaired as of June 30, 2012 (in thousands). All of the Bank’s RMBS are rated by Moody’s, S&P and/or Fitch. The credit ratings presented in the first table represent the lowest rating assigned to the security by these NRSROs as of June 30, 2012.

13

			Three Months Ended June 30, 2012							Six Months Ended June 30, 2012
	Period of Initial Impairment	Credit Rating	Credit Component of OTTI		Non-Credit Component of OTTI			Total OTTI		Credit Component of OTTI		Non-Credit Component of OTTI			Total OTTI
Security #1	Q1 2009	Triple-C	$	—	$	—		$	—	$	—	$	—		$	—
Security #2	Q1 2009	Triple-C	—		—			—		—		—			—
Security #3	Q2 2009	Single-C	137		(137		)	—		307		(307		)	—
Security #4	Q2 2009	Triple-C	—		—			—		—		—			—
Security #5	Q3 2009	Triple-C	—		—			—		—		—			—
Security #6	Q3 2009	Triple-C	—		—			—		—		—			—
Security #7	Q3 2009	Single-B	—		—			—		—		—			—
Security #8	Q1 2010	Triple-C	—		—			—		—		—			—
Security #9	Q1 2010	Single-B	—		—			—		—		—			—
Security #10	Q4 2010	Triple-C	—		—			—		—		—			—
Security #11	Q4 2010	Triple-C	—		—			—		—		—			—
Security #12	Q4 2010	Triple-C	—		—			—		—		—			—
Security #13	Q4 2010	Triple-C	—		—			—		—		—			—
Security #14	Q2 2011	Single-B	9		195			204		53		151			204
Totals			$	146	$	58		$	204	$	360	$	(156	)	$	204

	June 30, 2012				Cumulative from Period of Initial Impairment Through June 30, 2012				June 30, 2012
	Unpaid Principal Balance		Amortized Cost		Non-Credit Component of OTTI		Accretion of Non-Credit Component		Carrying Value		Estimated Fair Value
Security #1	$	15,058	$	12,156	$	10,271	$	6,553	$	8,438	$	7,878
Security #2	15,911		15,219		12,389		6,992		9,822		9,383
Security #3	28,716		23,848		15,283		9,304		17,869		19,788
Security #4	10,800		10,089		7,890		4,577		6,776		6,893
Security #5	18,443		16,736		10,047		5,823		12,512		10,465
Security #6	15,882		14,488		10,567		5,426		9,347		9,915
Security #7	6,150		6,074		3,575		1,757		4,256		3,853
Security #8	8,816		8,794		4,968		2,271		6,097		5,610
Security #9	3,793		3,756		2,208		974		2,522		2,422
Security #10	7,207		6,785		3,331		997		4,451		4,153
Security #11	8,809		8,804		4,096		1,214		5,922		5,688
Security #12	4,747		4,665		1,820		560		3,405		2,918
Security #13	5,490		5,475		2,418		832		3,889		3,556
Security #14	18,928		18,701		5,942		1,494		14,253		14,253
Totals	$	168,750	$	155,590	$	94,805	$	48,774	$	109,559	$	106,775

For those securities for which an other-than-temporary impairment was determined to have occurred as of June 30, 2012, the following table presents a summary of the significant inputs used to measure the amount of the credit loss recognized in earnings during the three months ended June 30, 2012 (dollars in thousands):

14

					Significant Inputs(2)
	Year of Securitization	Collateral Type(1)	Unpaid Principal Balance as of June 30, 2012		Projected Prepayment Rate	Projected Default Rate	Projected Loss Severity	Current Credit Enhancement as of June 30, 2012(3)
Security #3	2006	Alt-A/Fixed Rate	$	28,716	9.0%	41.8%	47.4%	3.8	%
Security #14	2005	Alt-A/Fixed Rate	18,928		12.2%	20.4%	41.4%	7.2	%
Total			$	47,644

_____________________________

⁽¹⁾  Security #14 is the only security presented in the table above that was labeled as Alt-A at the time of issuance; however, based upon their current collateral or performance characteristics, both of the other-than-temporarily impaired securities presented in the table above were analyzed using Alt-A assumptions.

⁽²⁾  Prepayment rates reflect the weighted average of projected future voluntary prepayments. Default rates reflect the total balance of loans projected to default as a percentage of the current unpaid principal balance of the underlying loan pool. Loss severities reflect the total projected loan losses as a percentage of the total balance of loans that are projected to default.

⁽³⁾  Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior class held by the Bank is impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pool before the security held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pool, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.

The following table presents a rollforward for the three and six months ended June 30, 2012 and 2011 of the amount related to credit losses on the Bank’s non-agency RMBS holdings for which a portion of an other-than-temporary impairment has been recognized in other comprehensive income (loss) (in thousands).

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Balance of credit losses, beginning of period	$	12,893	$	7,954	$	12,679	$	6,576
Credit losses on securities for which an other-than-temporary impairment was not previously recognized	—		21		—		21
Credit losses on securities for which an other-than-temporary impairment was previously recognized	146		2,323		360		3,701
Balance of credit losses, end of period	$	13,039	$	10,298	$	13,039	$	10,298

Because the Bank currently expects to recover the entire amortized cost basis of each of its other 30 non-agency RMBS holdings (including the 12 securities that were previously deemed to be other-than-temporarily impaired), and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, the Bank does not consider any of these other non-agency RMBS to be other-than-temporarily impaired (or, in the case of the 12 previously impaired securities, further impaired) at June 30, 2012.

Redemption Terms. The amortized cost, carrying value and estimated fair value of held-to-maturity securities by contractual maturity at June 30, 2012 and December 31, 2011 are presented below (in thousands). The expected maturities of some debentures could differ from the contractual maturities presented because issuers may have the right to call such debentures prior to their final stated maturities.

15

	June 30, 2012						December 31, 2011
Contractual Maturity	Amortized Cost		Carrying Value		Estimated Fair Value		Amortized Cost		Carrying Value		Estimated Fair Value
Debentures
Due in one year or less	$	1,010	$	1,010	$	1,018	$	—	$	—	$	—
Due after one year through five years	3,751		3,751		3,802		1,521		1,521		1,541
Due after five years through ten years	28,347		28,347		28,426		24,037		24,037		24,307
Due after ten years	8,940		8,940		8,804		19,784		19,784		19,493
	42,048		42,048		42,050		45,342		45,342		45,341
Mortgage-backed securities	5,461,462		5,415,431		5,480,055		6,429,697		6,378,268		6,437,061
Total	$	5,503,510	$	5,457,479	$	5,522,105	$	6,475,039	$	6,423,610	$	6,482,402

The amortized cost of the Bank’s mortgage-backed securities classified as held-to-maturity includes net purchase discounts of $66,590,000 and $79,050,000 at June 30, 2012 and December 31, 2011, respectively.

Interest Rate Payment Terms. The following table provides interest rate payment terms for investment securities classified as held-to-maturity at June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012		December 31, 2011
Amortized cost of variable-rate held-to-maturity securities other than mortgage-backed securities	$	42,048	$	45,342
Amortized cost of held-to-maturity mortgage-backed securities
Fixed-rate pass-through securities	618		693
Collateralized mortgage obligations
Fixed-rate	1,187		1,329
Variable-rate	5,459,657		6,427,675
	5,461,462		6,429,697
Total	$	5,503,510	$	6,475,039

All of the Bank’s variable-rate collateralized mortgage obligations classified as held-to-maturity securities have coupon rates that are subject to interest rate caps, none of which were reached during 2011 or the six months ended June 30, 2012.

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Note 5—Advances

Redemption Terms. At both June 30, 2012 and December 31, 2011, the Bank had advances outstanding at interest rates ranging from 0.04 percent to 8.61 percent, as summarized below (in thousands).

	June 30, 2012					December 31, 2011
Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Overdrawn demand deposit accounts	$	5,964		—	%	$	9,835		—	%
Due in one year or less	9,150,086			0.71		6,723,261			0.79
Due after one year through two years	2,124,968			1.51		3,014,405			2.02
Due after two years through three years	869,186			2.44		1,784,808			1.15
Due after three years through four years	558,300			2.60		794,166			2.90
Due after four years through five years	889,163			3.13		406,464			3.23
Due after five years	2,618,216			3.53		3,029,162			3.74
Amortizing advances	2,473,623			4.07		2,517,442			4.20
Total par value	18,689,506			1.89	%	18,279,543			2.13	%
Deferred prepayment fees	(21,983		)			(24,713		)
Commitment fees	(121		)			(125		)
Hedging adjustments	539,977					543,129
Total	$	19,207,379				$	18,797,834

The balances of overdrawn demand deposit accounts were fully collateralized at June 30, 2012 and December 31, 2011 and were repaid in early July 2012 and early January 2012, respectively. Amortizing advances require repayment according to predetermined amortization schedules.

The Bank offers advances to members that may be prepaid on specified dates without the member incurring prepayment or termination fees (prepayable and callable advances). The prepayment of other advances requires the payment of a fee to the Bank (prepayment fee) if necessary to make the Bank financially indifferent to the prepayment of the advance. At June 30, 2012 and December 31, 2011, the Bank had aggregate prepayable and callable advances totaling $130,022,000 and $143,017,000, respectively.

The following table summarizes advances at June 30, 2012 and December 31, 2011, by the earliest of contractual maturity, next call date, or the first date on which prepayable advances can be repaid without a prepayment fee (in thousands):

Contractual Maturity or Next Call Date	June 30, 2012		December 31, 2011
Overdrawn demand deposit accounts	$	5,964	$	9,835
Due in one year or less	9,155,086		6,788,295
Due after one year through two years	2,119,968		3,039,360
Due after two years through three years	869,186		1,797,856
Due after three years through four years	558,300		808,048
Due after four years through five years	889,163		424,374
Due after five years	2,618,216		2,894,333
Amortizing advances	2,473,623		2,517,442
Total par value	$	18,689,506	$	18,279,543

The Bank also offers putable advances. With a putable advance, the Bank purchases a put option from the member that allows the Bank to terminate the fixed-rate advance on specified dates and offer, subject to certain conditions, replacement

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funding at prevailing market rates. At June 30, 2012 and December 31, 2011, the Bank had putable advances outstanding totaling $2,999,071,000 and $3,093,321,000, respectively.

The following table summarizes advances at June 30, 2012 and December 31, 2011, by the earlier of contractual maturity or next possible put date (in thousands):

Contractual Maturity or Next Put Date	June 30, 2012		December 31, 2011
Overdrawn demand deposit accounts	$	5,964	$	9,835
Due in one year or less	11,630,557		9,502,332
Due after one year through two years	2,007,968		2,588,806
Due after two years through three years	776,786		1,774,407
Due after three years through four years	431,800		623,166
Due after four years through five years	579,163		353,964
Due after five years	783,645		909,591
Amortizing advances	2,473,623		2,517,442
Total par value	$	18,689,506	$	18,279,543

Interest Rate Payment Terms. The following table provides interest rate payment terms for advances at June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012		December 31, 2011
Fixed-rate
Due in one year or less	$	8,165,504	$	6,706,765
Due after one year	8,456,038		9,472,601
Total fixed-rate	16,621,542		16,179,366
Variable-rate
Due in one year or less	1,023,964		47,177
Due after one year	1,044,000		2,053,000
Total variable-rate	2,067,964		2,100,177
Total par value	$	18,689,506	$	18,279,543

At June 30, 2012 and December 31, 2011, 43 percent and 46 percent, respectively, of the Bank’s fixed-rate advances were swapped to a variable rate.

Prepayment Fees. When a member/borrower prepays an advance, the Bank could suffer lower future income if the principal portion of the prepaid advance is reinvested in lower-yielding assets. To protect against this risk, the Bank generally charges a prepayment fee that makes it financially indifferent to a borrower’s decision to prepay an advance. The Bank records prepayment fees received from members/borrowers on prepaid advances net of any associated hedging adjustments on those advances. These fees are reflected as interest income in the statements of income either immediately (as prepayment fees on advances) or over time (as interest income on advances) as further described below. In cases in which the Bank funds a new advance concurrent with or within a short period of time before or after the prepayment of an existing advance and the advance meets the accounting criteria to qualify as a modification of the prepaid advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized into interest income over the life of the modified advance using the level-yield method. Gross advance prepayment fees received from members/borrowers were $2,145,000 and $12,779,000 during the three months ended June 30, 2012 and 2011, respectively, and were $5,783,000 and $15,170,000 during the six months ended June 30, 2012 and 2011, respectively. During the three and six months ended June 30, 2012, the Bank deferred $128,000 and $432,000 of the gross advance prepayment fees. The Bank deferred $0 and $51,000 of the gross advance prepayment fees during the three and six months ended June 30, 2011, respectively.

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Note 6—Allowance for Credit Losses

An allowance for credit losses is separately established for each of the Bank’s identified portfolio segments, if necessary, to provide for probable losses inherent in its financing receivables portfolio and other off-balance sheet credit exposures as of the balance sheet date. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability.

A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. The Bank has developed and documented a systematic methodology for determining an allowance for credit losses for the following portfolio segments: (1) advances and other extensions of credit to members, collectively referred to as “extensions of credit to members;” (2) government-guaranteed/insured mortgage loans held for portfolio; and (3) conventional mortgage loans held for portfolio.

Classes of financing receivables are generally a disaggregation of a portfolio segment and are determined on the basis of their initial measurement attribute, the risk characteristics of the financing receivable and an entity’s method for monitoring and assessing credit risk. Because the credit risk arising from the Bank’s financing receivables is assessed and measured at the portfolio segment level, the Bank does not have separate classes of financing receivables within each of its portfolio segments.

During the six months ended June 30, 2012 and 2011, there were no purchases or sales of financing receivables, nor were any financing receivables reclassified to held for sale.

Advances and Other Extensions of Credit to Members. In accordance with federal statutes, including the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”), the Bank lends to financial institutions within its five-state district that are involved in housing finance. The FHLB Act requires the Bank to obtain and maintain sufficient collateral for advances and other extensions of credit to protect against losses. The Bank makes advances and otherwise extends credit only against eligible collateral, as defined by regulation. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances and other extensions of credit, the Bank applies various haircuts, or discounts, to the collateral to determine the value against which borrowers may borrow. As additional security, the Bank has a statutory lien on each borrower’s capital stock in the Bank.

On at least a quarterly basis, the Bank evaluates all outstanding extensions of credit to members/borrowers for potential credit losses. These evaluations include a review of: (1) the amount, type and performance of collateral available to secure the outstanding obligations; (2) metrics that may be indicative of changes in the financial condition and general creditworthiness of the member/borrower; and (3) the payment status of the obligations. Any outstanding extensions of credit that exhibit a potential credit weakness that could jeopardize the full collection of the outstanding obligations would be classified as substandard, doubtful or loss. The Bank did not have any advances or other extensions of credit to members/borrowers that were classified as substandard, doubtful or loss at June 30, 2012 or December 31, 2011.

The Bank considers the amount, type and performance of collateral to be the primary indicator of credit quality with respect to its extensions of credit to members/borrowers. At June 30, 2012 and December 31, 2011, the Bank had rights to collateral on a borrower-by-borrower basis with an estimated value in excess of each borrower’s outstanding extensions of credit.

The Bank continues to evaluate and, as necessary, modify its credit extension and collateral policies based on market conditions. At June 30, 2012 and December 31, 2011, the Bank did not have any advances that were past due, on non-accrual status, or considered impaired. There have been no troubled debt restructurings related to advances.

The Bank has never experienced a credit loss on an advance or any other extension of credit to a member/borrower and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on its extensions of credit to members/borrowers. Accordingly, the Bank has not provided any allowance for credit losses on advances, nor has it recorded any liabilities to reflect an allowance for credit losses related to its off-balance sheet credit exposures.

Mortgage Loans — Government-guaranteed/Insured. The Bank’s government-guaranteed/insured fixed-rate mortgage loans are insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs. Any losses from such loans are expected to be recovered from those entities. Any losses from such loans that are not recovered from those entities are absorbed by the servicers. Therefore, the Bank has not established an allowance for credit losses on government-guaranteed/insured mortgage loans. Government-guaranteed/insured loans are not placed on non-accrual status.

Mortgage Loans — Conventional Mortgage Loans. The Bank’s conventional mortgage loans were acquired through the Mortgage Partnership Finance^® (“MPF”^®) program, as more fully described in the Bank’s 2011 10-K. The allowance for losses on conventional mortgage loans is determined by an analysis that includes consideration of various data such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The allowance for losses on conventional mortgage loans also factors in the credit enhancement under the MPF program. Any incurred losses that are expected to be recovered from the credit enhancements are not reserved as part of the Bank’s allowance for loan losses.

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The Bank places a conventional mortgage loan on non-accrual status when the collection of the contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The Bank records cash payments received on non-accrual loans first as interest income until it recovers all interest, and then as a reduction of principal. A loan on non-accrual status may be restored to accrual status when (1) none of its contractual principal and interest is due and unpaid, and the Bank expects repayment of the remaining contractual interest and principal, or (2) the loan otherwise becomes well secured and in the process of collection.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collateral-dependent loans that are on non-accrual status are measured for impairment based on the fair value of the underlying property less estimated selling costs. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property; that is, there is no other available and reliable source of repayment. A collateral-dependent loan is impaired if the fair value of the underlying collateral is insufficient to recover the unpaid principal and interest on the loan. Interest income on impaired loans is recognized in the same manner as it is for non-accrual loans noted above.

The Bank evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded if the recorded investment in the loan will not be recovered.

The Bank considers the key credit quality indicator for conventional mortgage loans to be the payment status of each loan. The table below summarizes the unpaid principal balance by payment status for mortgage loans at June 30, 2012 and December 31, 2011 (dollar amounts in thousands). The unpaid principal balance approximates the recorded investment in the loans.

	June 30, 2012									December 31, 2011
	Conventional Loans			Government- Guaranteed/ Insured Loans			Total			Conventional Loans			Government- Guaranteed/ Insured Loans			Total
Mortgage loans:
30-59 days delinquent	$	1,236		$	3,491		$	4,727		$	1,789		$	3,978		$	5,767
60-89 days delinquent	326			636			962			656			1,125			1,781
90 days or more delinquent	1,079			434			1,513			1,203			944			2,147
Total past due	2,641			4,561			7,202			3,648			6,047			9,695
Total current loans	67,667			64,871			132,538			78,902			73,179			152,081
Total mortgage loans	$	70,308		$	69,432		$	139,740		$	82,550		$	79,226		$	161,776
Other delinquency statistics:
In process of foreclosure(1)	$	346		$	221		$	567		$	354		$	304		$	658
Serious delinquency rate (2)	1.5		%	0.6		%	1.1		%	1.5		%	1.2		%	1.3		%
Past due 90 days or more and still accruing interest (3)	$	—		$	434		$	434		$	—		$	944		$	944
Non-accrual loans	$	1,079		$	—		$	1,079		$	1,203		$	—		$	1,203
Troubled debt restructurings	$	99		$	—		$	99		$	100		$	—		$	100

_____________________________

⁽¹⁾  Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been made.

⁽²⁾  Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio.

⁽³⁾  Only government-guaranteed/insured mortgage loans continue to accrue interest after they become 90 days past due.

At June 30, 2012 and December 31, 2011, the Bank’s other assets included $168,000 and $211,000, respectively, of real estate owned.

Mortgage loans are considered impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all principal and interest amounts due according to the contractual terms of the mortgage loan agreement. Each non-accrual mortgage loan is specifically reviewed for impairment. At June 30, 2012 and December 31, 2011, the estimated value of the collateral securing each of these loans was in excess of the outstanding loan amount. Therefore, none of these loans were considered impaired and no specific reserve was established for any of these mortgage loans. The remaining conventional mortgage loans were evaluated for impairment on a pool basis. Based upon the current and past performance of

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these loans, the underwriting standards in place at the time the loans were acquired, and current economic conditions, the Bank determined that an allowance for loan losses of $190,000 was adequate to reserve for credit losses in its conventional mortgage loan portfolio at June 30, 2012. The following table presents the activity in the allowance for credit losses on conventional mortgage loans held for portfolio during the three and six months ended June 30, 2012 and 2011 (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012			2011
Balance, beginning of period	$	190	$	225		$	192		$	225
Chargeoffs	—		(7		)	(2		)	(7		)
Balance, end of period	$	190	$	218		$	190		$	218

	June 30, 2012		December 31, 2011
Ending balance of allowance for credit losses related to loans collectively evaluated for impairment	$	190	$	192
Unpaid principal balance
Individually evaluated for impairment	$	1,178	$	1,203
Collectively evaluated for impairment	69,130		81,347
	$	70,308	$	82,550

Note 7—Consolidated Obligations

Consolidated obligations are the joint and several obligations of the FHLBanks and consist of consolidated obligation bonds and discount notes. Consolidated obligations are backed only by the financial resources of the 12 FHLBanks. Consolidated obligations are not obligations of, nor are they guaranteed by, the U.S. government. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. In connection with each debt issuance, one or more of the FHLBanks specifies the amount of debt it wants issued on its behalf; the Bank receives the proceeds only of the debt issued on its behalf and is the primary obligor only for the portion of bonds and discount notes for which it has received the proceeds. The Bank records on its statements of condition only that portion of the consolidated obligations for which it is the primary obligor. Consolidated obligation bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated obligation discount notes are issued to raise short-term funds and have maturities of one year or less. These notes are issued at a price that is less than their face amount and are redeemed at par value when they mature. For additional information regarding the FHLBanks’ joint and several liability on consolidated obligations, see Note 13.

The par amounts of the 12 FHLBanks’ outstanding consolidated obligations, including consolidated obligations held as investments by other FHLBanks, were approximately $685 billion and $692 billion at June 30, 2012 and December 31, 2011, respectively. The Bank was the primary obligor on $31.4 billion and $29.7 billion (at par value), respectively, of these consolidated obligations.

Interest Rate Payment Terms. The following table summarizes the Bank’s consolidated obligation bonds outstanding by interest rate payment terms at June 30, 2012 and December 31, 2011 (in thousands, at par value).

	June 30, 2012		December 31, 2011
Fixed-rate	$	17,686,230	$	16,267,810
Simple variable-rate	1,500,000		895,000
Step-up	2,572,000		2,554,500
Fixed that converts to variable	62,000		211,000
Step-down	50,000		—
Total par value	$	21,870,230	$	19,928,310

At June 30, 2012 and December 31, 2011, 88 percent and 85 percent, respectively, of the Bank’s fixed-rate consolidated obligation bonds were swapped to a variable rate and 47 percent and 100 percent, respectively, of the Bank’s variable-rate consolidated obligation bonds were either swapped to a different variable-rate index or hedged with interest rate swaps that contain embedded caps that offset interest rate caps embedded in the bonds.

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Redemption Terms. The following is a summary of the Bank’s consolidated obligation bonds outstanding at June 30, 2012 and December 31, 2011, by contractual maturity (in thousands):

	June 30, 2012					December 31, 2011
Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in one year or less	$	6,835,500		1.51	%	$	9,467,905		1.42	%
Due after one year through two years	8,259,940			1.15		2,345,000			1.62
Due after two years through three years	2,828,790			1.43		4,211,650			1.48
Due after three years through four years	707,000			3.79		461,255			3.51
Due after four years through five years	375,000			1.23		702,000			3.19
Thereafter	2,864,000			2.50		2,740,500			2.78
Total par value	21,870,230			1.56	%	19,928,310			1.75	%
Premiums	111,911					37,189
Discounts	(7,366		)			(8,225		)
Hedging adjustments	74,532					112,782
Total	$	22,049,307				$	20,070,056

At June 30, 2012 and December 31, 2011, the Bank’s consolidated obligation bonds outstanding included the following (in thousands, at par value):

	June 30, 2012		December 31, 2011
Non-callable bonds	$	18,546,230	$	13,061,555
Callable bonds	3,324,000		6,866,755
Total par value	$	21,870,230	$	19,928,310

The following table summarizes the Bank’s consolidated obligation bonds outstanding at June 30, 2012 and December 31, 2011, by the earlier of contractual maturity or next possible call date (in thousands, at par value):

Contractual Maturity or Next Call Date	June 30, 2012		December 31, 2011
Due in one year or less	$	9,739,500	$	15,343,405
Due after one year through two years	8,349,940		2,420,000
Due after two years through three years	2,753,790		996,650
Due after three years through four years	625,000		336,255
Due after four years through five years	—		430,000
Thereafter	402,000		402,000
Total par value	$	21,870,230	$	19,928,310

Discount Notes. At June 30, 2012 and December 31, 2011, the Bank’s consolidated obligation discount notes, all of which are due within one year, were as follows (in thousands):

	Book Value		Par Value		Weighted Average Implied Interest Rate
June 30, 2012	$	9,507,659	$	9,508,263	0.09	%
December 31, 2011	$	9,799,010	$	9,800,000	0.06	%

At December 31, 2011, 52 percent of the Bank’s consolidated obligation discount notes were swapped to a variable rate. None of the Bank's consolidated obligation discount notes were swapped at June 30, 2012.

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Note 8—Affordable Housing Program (“AHP”)

The following table summarizes the changes in the Bank’s AHP liability during the six months ended June 30, 2012 and 2011 (in thousands):

	Six Months Ended June 30,
	2012			2011
Balance, beginning of period	$	32,313		$	41,044
AHP assessment	5,199			2,031
Grants funded, net of recaptured amounts	(7,028		)	(6,715		)
Balance, end of period	$	30,484		$	36,360

Note 9—Derivatives and Hedging Activities

Hedging Activities. As a financial intermediary, the Bank is exposed to interest rate risk. This risk arises from a variety of financial instruments that the Bank enters into on a regular basis in the normal course of its business. The Bank enters into interest rate swap, swaption, cap and forward rate agreements (collectively, interest rate exchange agreements) to manage its exposure to changes in interest rates. The Bank may use these instruments to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve risk management objectives. The Bank has not entered into any credit default swaps or foreign exchange-related derivatives, nor is it currently a party to any forward rate agreements.

The Bank uses interest rate exchange agreements in two ways: either by designating the agreement as a fair value hedge of a specific financial instrument or firm commitment or by designating the agreement as a hedge of some defined risk in the course of its balance sheet management (referred to as an “economic hedge”). For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets (both advances and investments), and/or to adjust the interest rate sensitivity of advances or investments to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank also uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities, to hedge the duration risk of prepayable instruments, to offset interest rate exchange agreements entered into with members (the Bank serves as an intermediary in these transactions), and to reduce funding costs.

The Bank, consistent with Finance Agency regulations, enters into interest rate exchange agreements only to reduce potential market risk exposures inherent in otherwise unhedged assets and liabilities or to act as an intermediary between its members and the Bank’s derivative counterparties. The Bank is not a derivatives dealer and it does not trade derivatives for short-term profit.

At inception, the Bank formally documents the relationships between derivatives designated as hedging instruments and their hedged items, its risk management objectives and strategies for undertaking the hedge transactions, and its method for assessing the effectiveness of the hedging relationships. This process includes linking all derivatives that are designated as fair value hedges to: (1) specific assets and liabilities on the statements of condition or (2) firm commitments. The Bank also formally assesses (both at the inception of the hedging relationship and on a monthly basis thereafter) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of hedged items and whether those derivatives may be expected to remain effective in future periods. The Bank uses regression analyses to assess the effectiveness of its hedges.

Investments — The Bank has invested in agency and non-agency MBS, all of which are classified as held-to-maturity. The interest rate and prepayment risk associated with these investment securities is managed through consolidated obligations and/or derivatives. The Bank may manage prepayment and duration risk presented by some investment securities with either callable or non-callable consolidated obligations or interest rate exchange agreements, including caps and interest rate swaps.

A substantial portion of the Bank’s held-to-maturity securities are variable-rate MBS that include caps that would limit the variable-rate coupons if short-term interest rates rise dramatically. To hedge a portion of the potential cap risk embedded in these securities, the Bank enters into interest rate cap agreements. These derivatives are treated as economic hedges.

The Bank has also invested in agency and other highly rated debentures. Substantially all of the Bank's available-for-sale securities are fixed-rate debentures. To hedge the interest rate risk associated with these fixed-rate investment securities, the Bank enters into fixed-for-floating interest rate exchange agreements, which are designated as fair value hedges.

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Advances — The Bank issues both fixed-rate and variable-rate advances. When appropriate, the Bank uses interest rate exchange agreements to adjust the interest rate sensitivity of its fixed-rate advances to approximate more closely the interest rate sensitivity of its liabilities. With issuances of putable advances, the Bank purchases from the member a put option that enables the Bank to terminate a fixed-rate advance on specified future dates. This embedded option is clearly and closely related to the host advance contract. The Bank typically hedges a putable advance by entering into a cancelable interest rate exchange agreement where the Bank pays a fixed coupon and receives a variable coupon, and sells an option to cancel the swap to the swap counterparty. This type of hedge is treated as a fair value hedge. The swap counterparty can cancel the interest rate exchange agreement on the call date and the Bank can cancel the putable advance and offer, subject to certain conditions, replacement funding at prevailing market rates.

A small portion of the Bank’s variable-rate advances are subject to interest rate caps that would limit the variable-rate coupons if short-term interest rates rise above a predetermined level. To hedge the cap risk embedded in these advances, the Bank generally enters into interest rate cap agreements. This type of hedge is treated as a fair value hedge.

The Bank may hedge a firm commitment for a forward-starting advance through the use of an interest rate swap. In this case, the swap will function as the hedging instrument for both the firm commitment and the subsequent advance. The carrying value of the firm commitment will be included in the basis of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment will then be amortized into interest income over the life of the advance.

The Bank enters into optional advance commitments with its members. In an optional advance commitment, the Bank sells an option to the member that provides the member with the right to enter into an advance at a specified fixed rate and term on a specified future date, provided the member has satisfied all of the customary requirements for such advance. Optional advance commitments involving Community Investment Program (“CIP”) and Economic Development Program (“EDP”) advances with a commitment period of three months or less are currently provided at no cost to members. The Bank may hedge an optional advance commitment through the use of an interest rate swaption. In this case, the swaption will function as the hedging instrument for both the commitment and, if the option is exercised by the member, the subsequent advance. These swaptions are treated as economic hedges.

Consolidated Obligations— While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank is the primary obligor for the consolidated obligations it has issued or assumed from another FHLBank. The Bank generally enters into derivative contracts to hedge the interest rate risk associated with its specific debt issuances.

To manage the interest rate risk of certain of its consolidated obligations, the Bank will match the cash outflow on a consolidated obligation with the cash inflow of an interest rate exchange agreement. With issuances of fixed-rate consolidated obligation bonds, the Bank typically enters into a matching interest rate exchange agreement in which the counterparty pays fixed cash flows to the Bank that are designed to mirror in timing and amount the cash outflows the Bank pays on the consolidated obligation. In this transaction, the Bank pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate assets, typically one-month or three-month LIBOR. These transactions are treated as fair value hedges. On occasion, the Bank may enter into fixed-for-floating interest rate exchange agreements to hedge the interest rate risk associated with certain of its consolidated obligation discount notes. The derivatives associated with the Bank’s discount note hedging are treated as economic hedges. The Bank may also use interest rate exchange agreements to convert variable-rate consolidated obligation bonds from one index rate (e.g., the daily federal funds rate) to another index rate (e.g., one-month or three-month LIBOR); these transactions are treated as economic hedges.

The Bank has not issued consolidated obligations denominated in currencies other than U.S. dollars.

Balance Sheet Management — From time to time, the Bank may enter into interest rate basis swaps to reduce its exposure to changing spreads between one-month and three-month LIBOR. In addition, to reduce its exposure to reset risk, the Bank may occasionally enter into forward rate agreements. These derivatives are treated as economic hedges.

Intermediation — The Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their hedging needs. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties. All interest rate exchange agreements related to the Bank’s intermediary activities with its members are accounted for as economic hedges.

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Accounting for Derivatives and Hedging Activities. The Bank accounts for derivatives and hedging activities in accordance with the guidance in Topic 815 of the FASB’s Accounting Standards Codification (“ASC”) entitled “Derivatives and Hedging” (“ASC 815”). All derivatives are recognized on the statements of condition at their fair values, including accrued interest receivable and payable. For purposes of reporting derivative assets and derivative liabilities, the Bank offsets the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement (including any cash collateral remitted to or received from the counterparty).

Changes in the fair value of a derivative that is effective as — and that is designated and qualifies as — a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect gains or losses on firm commitments), are recorded in current period earnings. Any hedge ineffectiveness (which represents the amount by which the change in the fair value of the derivative differs from the change in the fair value of the hedged item attributable to the hedged risk) is recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.” Net interest income/expense associated with derivatives that qualify for fair value hedge accounting under ASC 815 is recorded as a component of net interest income. An economic hedge is defined as a derivative hedging specific or non-specific assets or liabilities that does not qualify or was not designated for hedge accounting under ASC 815, but is an acceptable hedging strategy under the Bank’s Risk Management Policy. These hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge by definition introduces the potential for earnings variability as changes in the fair value of a derivative designated as an economic hedge are recorded in current period earnings with no offsetting fair value adjustment to an asset or liability. Both the net interest income/expense and the fair value adjustments associated with derivatives in economic hedging relationships are recorded in other income (loss) as “net gains (losses) on derivatives and hedging activities.” Cash flows associated with derivatives are reported as cash flows from operating activities in the statements of cash flows, unless the derivatives contain an other-than-insignificant financing element, in which case the cash flows are reported as cash flows from financing activities.

If hedging relationships meet certain criteria specified in ASC 815, they are eligible for hedge accounting and the offsetting changes in fair value of the hedged items may be recorded in earnings. The application of hedge accounting generally requires the Bank to evaluate the effectiveness of the hedging relationships on an ongoing basis and to calculate the changes in fair value of the derivatives and related hedged items independently. This is commonly known as the “long-haul” method of hedge accounting. Transactions that meet more stringent criteria qualify for the “short-cut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative. The Bank considers hedges of committed advances to be eligible for the short-cut method of accounting as long as the settlement of the committed advance occurs within the shortest period possible for that type of instrument based on market settlement conventions, the fair value of the swap is zero at the inception of the hedging relationship, and the transaction meets all of the other criteria for short-cut accounting specified in ASC 815. The Bank has defined the market settlement convention to be five business days or less for advances. The Bank records the changes in fair value of the derivative and the hedged item beginning on the trade date.

The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded” and the financial instrument that embodies the embedded derivative instrument is not remeasured at fair value with changes in fair value reported in earnings as they occur. Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as either (1) a hedging instrument in a fair value hedge or (2) a stand-alone derivative instrument pursuant to an economic hedge. However, if the entire contract were to be measured at fair value, with changes in fair value reported in current earnings, or if the Bank could not reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract would be carried on the statement of condition at fair value and no portion of the contract would be separately accounted for as a derivative.

The Bank discontinues hedge accounting prospectively when: (1) management determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; (3) a hedged firm commitment no longer meets the definition of a firm commitment; or (4) management determines that designating the derivative as a hedging instrument in accordance with ASC 815 is no longer appropriate.

When fair value hedge accounting for a specific derivative is discontinued due to the Bank’s determination that such derivative no longer qualifies for hedge accounting treatment, the Bank will continue to carry the derivative on the statement of condition at its fair value, cease to adjust the hedged asset or liability for changes in fair value, and amortize the cumulative basis

25

adjustment on the formerly hedged item into earnings over its remaining term using the level-yield method. In all cases in which hedge accounting is discontinued and the derivative remains outstanding, the Bank will carry the derivative at its fair value on the statement of condition, recognizing changes in the fair value of the derivative in current period earnings.

When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.

Impact of Derivatives and Hedging Activities. The following table summarizes the notional balances and estimated fair values of the Bank’s outstanding derivatives at June 30, 2012 and December 31, 2011 (in thousands).

	June 30, 2012								December 31, 2011
	Notional Amount of Derivatives		Estimated Fair Value						Notional Amount of Derivatives		Estimated Fair Value
			Derivative Assets			Derivative Liabilities					Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments under ASC 815
Interest rate swaps
Advances	$	7,092,450	$	—		$	576,042		$	7,486,685	$	71		$	582,130
Available-for-sale securities	4,918,709		52			814,407			4,183,634		9			691,831
Consolidated obligation bonds	18,110,730		123,978			8,232			16,395,010		166,171			3,722
Interest rate caps related to advances	28,000		26			—			28,000		100			—
Total derivatives designated as hedging instruments under ASC 815	30,149,889		124,056			1,398,681			28,093,329		166,351			1,277,683
Derivatives not designated as hedging instruments under ASC 815
Interest rate swaps
Advances	500		—			16			20,000		—			113
Consolidated obligation bonds	650,000		538			—			750,000		16			1,760
Consolidated obligation discount notes	—		—			—			5,047,380		1,188			490
Basis swaps	4,700,000		22,176			—			4,700,000		21,690			—
Intermediary transactions	92,758		7,177			6,975			92,758		6,104			5,900
Interest rate swaptions related to optional advance commitments	160,000		213			—			200,000		1,947			—
Interest rate caps
Held-to-maturity securities	3,900,000		952			—			3,900,000		3,753			—
Intermediary transactions	70,000		919			919			30,000		179			179
Total derivatives not designated as hedging instruments under ASC 815	9,573,258		31,975			7,910			14,740,138		34,877			8,442
Total derivatives before netting and collateral adjustments	$	39,723,147	156,031			1,406,591			$	42,833,467	201,228			1,286,125
Cash collateral and related accrued interest			(1,696		)	(1,090,746		)			(700		)	(563,183		)
Netting adjustments			(135,577		)	(135,577		)			(191,778		)	(191,778		)
Total collateral and netting adjustments(1)			(137,273		)	(1,226,323		)			(192,478		)	(754,961		)
Net derivative balances reported in statements of condition			$	18,758		$	180,268				$	8,750		$	531,164

_____________________________

⁽¹⁾  Amounts represent the effect of legally enforceable master netting agreements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

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The following table presents the components of net gains (losses) on derivatives and hedging activities as presented in the statements of income for the three and six months ended June 30, 2012 and 2011 (in thousands).

	Gain (Loss) Recognized in Earnings for the Three Months Ended June 30,						Gain (Loss) Recognized in Earnings for the Six Months Ended June 30,
	2012			2011			2012			2011
Derivatives and hedged items in ASC 815 fair value hedging relationships
Interest rate swaps	$	(1,696	)	$	(982	)	$	(2,317	)	$	(603	)
Interest rate caps	(39		)	(285		)	(74		)	(263		)
Total net loss related to fair value hedge ineffectiveness	(1,735		)	(1,267		)	(2,391		)	(866		)
Derivatives not designated as hedging instruments under ASC 815
Net interest income on interest rate swaps	2,918			1,435			5,866			3,103
Interest rate swaps
Advances	14			31			48			91
Consolidated obligation bonds	78			(716		)	2,258			(1,825		)
Consolidated obligation discount notes	(160		)	—			784			(497		)
Basis swaps	1,489			(1,946		)	505			(5,855		)
Intermediary transactions	1			2			(4		)	97
Interest rate swaptions related to optional advance commitments	(1,234		)	(4,822		)	(1,734		)	(3,720		)
Interest rate caps
Held-to-maturity securities	(1,416		)	(6,780		)	(2,800		)	(11,106		)
Intermediary transactions	6			5			6			5
Total net gain (loss) related to derivatives not designated as hedging instruments under ASC 815	1,696			(12,791		)	4,929			(19,707		)
Net gains (losses) on derivatives and hedging activities reported in the statements of income	$	(39	)	$	(14,058	)	$	2,538		$	(20,573	)

The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in ASC 815 fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income for the three and six months ended June 30, 2012 and 2011 (in thousands).

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Hedged Item	Gain (Loss) on Derivatives			Gain (Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness (1)			Derivative Net Interest Income(Expense)(2)
Three Months Ended June 30, 2012
Advances	$	(48,949	)	$	48,577		$	(372	)	$	(43,334	)
Available-for-sale securities	(118,600		)	117,506			(1,094		)	(17,639		)
Consolidated obligation bonds	(13,472		)	13,203			(269		)	44,339
Total	$	(181,021	)	$	179,286		$	(1,735	)	$	(16,634	)
Three Months Ended June 30, 2011
Advances	$	(79,127	)	$	78,928		$	(199	)	$	(54,815	)
Consolidated obligation bonds	26,084			(27,152		)	(1,068		)	69,988
Total	$	(53,043	)	$	51,776		$	(1,267	)	$	15,173
Six Months Ended June 30, 2012
Advances	$	(3,209	)	$	2,653		$	(556	)	$	(88,138	)
Available-for-sale securities	(95,947		)	95,531			(416		)	(33,957		)
Consolidated obligation bonds	(38,663		)	37,244			(1,419		)	88,441
Total	$	(137,819	)	$	135,428		$	(2,391	)	$	(33,654	)
Six Months Ended June 30, 2011
Advances	$	(3,791	)	$	3,995		$	204		$	(111,993	)
Consolidated obligation bonds	(37,874		)	36,804			(1,070		)	139,661
Total	$	(41,665	)	$	40,799		$	(866	)	$	27,668

_____________________________

⁽¹⁾  Reported as net gains (losses) on derivatives and hedging activities in the statements of income.

⁽²⁾  The net interest income (expense) associated with derivatives in ASC 815 fair value hedging relationships is reported in the statements of income in the interest income/expense line item for the indicated hedged item.

Credit Risk Related to Derivatives. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative agreements. To mitigate this risk, the Bank has entered into master agreements with each of its derivative counterparties, which provide for the netting of all transactions with each derivative counterparty. Collateral is delivered no less frequently than monthly and as often as daily when certain thresholds (ranging from $100,000 to $500,000) are met. The Bank manages derivative counterparty credit risk through the use of master agreements, credit analysis, and adherence to the requirements set forth in the Bank’s Risk Management Policy and Finance Agency regulations. Based on the netting provisions and collateral requirements of its master agreements and the creditworthiness of its derivative counterparties, Bank management does not currently anticipate any credit losses on its derivative agreements.

The notional amount of its interest rate exchange agreements does not measure the Bank’s credit risk exposure, and the maximum credit exposure for the Bank is substantially less than the notional amount. The maximum credit risk exposure is the estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with a counterparty with which the Bank is in a net gain position, if the counterparty were to default. In determining its maximum credit exposure to a counterparty, the Bank, as permitted under master netting provisions of its interest rate exchange agreements, nets its obligations to the counterparty (i.e., derivative liabilities) against the counterparty’s obligations to the Bank (i.e., derivative assets). Maximum credit risk also considers the impact of cash collateral held or remitted by the Bank. As of June 30, 2012 and December 31, 2011, the Bank held as collateral cash balances of $1,696,000 and $700,000, respectively. The cash collateral held is reported in derivative assets/liabilities in the statements of condition.

At June 30, 2012 and December 31, 2011, the Bank’s maximum credit risk, as defined above, was approximately $15,241,000 and $2,400,000, respectively. At June 30, 2012, the Bank held securities totaling $1,399,000 as collateral against this exposure. In early July 2012 and early January 2012, excess cash collateral of $13,441,000 and $2,100,000, respectively, was returned to the Bank pursuant to counterparty credit arrangements. In addition, at June 30, 2012, the Bank had pledged available-for-sale securities with an aggregate fair value of $182,881,000 to secure an aggregate outstanding exposure of $178,070,000 that two of its derivative counterparties had to the Bank. At December 31, 2011, the Bank had pledged available-for-sale securities with an aggregate fair value of $512,474,000 to secure an aggregate outstanding exposure of $517,254,000 that three of its derivative counterparties had to the Bank.

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The Bank transacts most of its interest rate exchange agreements with large financial institutions. Some of these institutions (or their affiliates) buy, sell, and distribute consolidated obligations.

When entering into interest rate exchange agreements with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. At June 30, 2012 and December 31, 2011, the net market value of the Bank’s derivatives with its members totaled $6,258,000 and $5,924,000, respectively.

Note 10—Capital

At all times during the six months ended June 30, 2012, the Bank was in compliance with all applicable statutory and regulatory capital requirements. The following table summarizes the Bank’s compliance with those capital requirements as of June 30, 2012 and December 31, 2011 (dollars in thousands):

	June 30, 2012						December 31, 2011
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	399,901		$	1,748,455		$	343,583		$	1,765,430
Total capital	$	1,389,159		$	1,748,455		$	1,350,799		$	1,765,430
Total capital-to-assets ratio	4.00		%	5.03		%	4.00		%	5.23		%
Leverage capital	$	1,736,449		$	2,622,683		$	1,688,498		$	2,648,145
Leverage capital-to-assets ratio	5.00		%	7.55		%	5.00		%	7.84		%

Shareholders are required to maintain an investment in Class B stock equal to the sum of a membership investment requirement and an activity-based investment requirement. Effective April 20, 2012, the membership investment requirement was reduced from 0.05 percent of each member's total assets as of the previous calendar year-end, subject to a minimum of $1,000 and a maximum of $10,000,000, to 0.04 percent percent of each member's total assets as of the previous calendar year-end, subject to a minimum of $1,000 and a maximum of $7,000,000. The activity-based investment requirement is currently 4.10 percent of outstanding advances.

The Bank generally repurchases surplus stock on the last business day of the month following the end of each calendar quarter. For the repurchases that occurred on January 31, 2012, April 30, 2012 and July 31, 2012, surplus stock was defined as the amount of stock held by a member in excess of 105.0 percent, 102.5 percent and 102.5 percent, respectively, of the member’s minimum investment requirement. Through January 31, 2012, the Bank’s practice was that a member’s surplus stock was not repurchased if the amount of that member’s surplus stock was $250,000 or less or if, subject to certain exceptions, the member was on restricted collateral status. For the repurchases that occurred on April 30, 2012 and July 31, 2012, a member's surplus stock was not repurchased if the amount of that member's surplus stock was $100,000 or less or if, subject to certain exceptions, the member was on restricted collateral status. On January 31, 2012, April 30, 2012 and July 31, 2012, the Bank repurchased surplus stock totaling $107,357,000, $189,907,000 and $139,178,000, respectively, of which $0, $197,000 and $0, respectively, was classified as mandatorily redeemable capital stock at those dates.

Note 11—Employee Retirement Plans

The Bank sponsors a retirement benefits program that includes health care and life insurance benefits for eligible retirees. Components of net periodic benefit cost related to this program for the three and six months ended June 30, 2012 and 2011 were as follows (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Service cost	$	4		$	3		$	8		$	7
Interest cost	23			28			45			56
Amortization of prior service credit	(9		)	(9		)	(18		)	(18		)
Amortization of net actuarial gain	(9		)	(6		)	(17		)	(12		)
Net periodic benefit cost	$	9		$	16		$	18		$	33

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Note 12—Estimated Fair Values

Fair value is defined under U.S. GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. U.S. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. U.S. GAAP also requires an entity to disclose the level within the fair value hierarchy in which each measurement is classified. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:

Level 1 Inputs — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2 Inputs — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads).

Level 3 Inputs — Unobservable inputs for the asset or liability that are supported by little or no market activity. None of the Bank’s assets or liabilities that are recorded at fair value on a recurring basis were measured using significant Level 3 inputs.

The following estimated fair value amounts have been determined by the Bank using available market information and the Bank’s best judgment of appropriate valuation methods. These estimates are based on pertinent information available to the Bank as of June 30, 2012 and December 31, 2011. Although the Bank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for many of the Bank’s financial instruments (e.g., advances, non-agency RMBS and mortgage loans held for portfolio), in certain cases, their fair values are not subject to precise quantification or verification. Therefore, the estimated fair values presented below in the Fair Value Summary Table may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. Further, the fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities.

The valuation techniques used to measure the fair values of the Bank’s financial instruments are described below.

Cash and due from banks. The estimated fair value equals the carrying value.

Interest-bearing deposit assets. Interest-bearing deposit assets earn interest at floating market rates; therefore, the estimated fair value of the deposits approximates their carrying value.

  Securities purchased under agreements to resell and federal funds sold. All federal funds sold and securities purchased under agreements to resell represent overnight balances. The estimated fair values approximate the carrying values.

Trading securities. The Bank obtains quoted prices for identical securities.

Available-for-sale and held-to-maturity securities. To value its available-for-sale securities and its held-to-maturity MBS holdings, the Bank obtains prices from four designated third-party pricing vendors when available. The pricing vendors use various proprietary models to price these securities. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Since many securities do not trade on a daily basis, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all security valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.

A "median" price is first established for each security using a formula that is based upon the number of prices received. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to some type of validation similar to the evaluation of outliers described below. All prices that are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price. All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some

30

other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price, as appropriate) is used as the final price rather than the default price. If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.

If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

As an additional step, the Bank reviewed the final fair value estimates of its non-agency RMBS holdings as of June 30, 2012 for reasonableness using an implied yield test. The Bank calculated an implied yield for each of its non-agency RMBS using the estimated fair value derived from the process described above and the security's projected cash flows from the Bank's OTTI process and compared those yields to the yields for comparable securities according to dealers and other third-party sources to the extent comparable market yield data was available. This analysis did not indicate that any adjustments to the final fair value estimates were necessary.

As of June 30, 2012, four vendor prices were received for the vast majority of the Bank’s available-for-sale securities and held-to-maturity MBS holdings and the final prices for substantially all of those securities were computed by averaging the four prices. Based on the Bank's understanding of the pricing methods employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the Bank's additional analyses), the Bank believes its final prices result in reasonable estimates of the fair values and that the fair value measurements are classified appropriately in the fair value hierarchy.

The Bank estimates the fair values of its held-to-maturity debentures using a pricing model and observable market data (i.e., the U.S. Government Agency Fair Value curve and, for debentures containing call features, swaption volatility).

Advances. The Bank determines the estimated fair values of advances by calculating the present value of expected future cash flows from the advances using the replacement advance rates for advances with similar terms and, for advances containing options, swaption volatility. This amount is then reduced for accrued interest receivable. Each FHLBank prices advances at a spread to its cost of funds. Each FHLBank's cost of funds approximates the "CO curve," which is derived by adding to the U.S. Treasury curve indicative spreads obtained from market-observable sources. The indicative spreads are generally derived from dealer pricing indications, recent trades, secondary market activity and historical pricing relationships.

Mortgage loans held for portfolio. The Bank estimates the fair values of mortgage loans held for portfolio based on observed market prices for agency MBS. Individual mortgage loans are pooled based on certain criteria such as loan type, weighted average coupon, and origination year and matched to reference securities with a similar collateral composition to derive benchmark pricing. The prices for agency MBS used as a benchmark are subject to certain market conditions including, but not limited to, the market’s expectations of future prepayments, the current and expected level of interest rates, and investor demand.

Accrued interest receivable and payable. The estimated fair value of accrued interest receivable and payable approximates the carrying value due to their short-term nature.

Derivative assets/liabilities. With the exception of its interest rate basis swaps, the fair values of the Bank’s interest rate swap and swaption agreements are estimated using a pricing model with inputs that are observable in the market (e.g., the relevant interest rate swap curve and, for agreements containing options, swaption volatility). As the provisions of the credit support annexes to the Bank’s master agreements with its derivative counterparties significantly reduce the risk from nonperformance (see Note 9), the Bank does not consider its own nonperformance risk or the nonperformance risk associated with each of its counterparties to be a significant factor in the valuation of its derivative assets and liabilities. The Bank compares the fair values obtained from its pricing model to non-binding dealer estimates and may also compare its fair values to those of similar instruments to ensure that such fair values are reasonable. For the Bank’s interest rate basis swaps, fair values are obtained from dealers (for each basis swap, one dealer estimate is received); these non-binding fair value estimates are corroborated using a pricing model and observable market data (i.e., the interest rate swap curve).

For the Bank’s interest rate caps, fair values are obtained from dealers (for each interest rate cap, one dealer estimate is received). These non-binding fair value estimates are corroborated using a pricing model and observable market data (e.g., the interest rate swap curve and cap volatility).

The fair values of the Bank’s derivative assets and liabilities include accrued interest receivable/payable and cash collateral remitted to/received from counterparties; the estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of derivatives are netted by counterparty pursuant to the provisions of the credit support annexes to the Bank’s master agreements with its derivative counterparties. If these netted amounts are positive, they are classified as an asset and, if negative, as a liability.

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Deposit liabilities. The Bank determines the estimated fair values of its deposit liabilities with fixed rates and more than three months to maturity by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are based on replacement funding rates for liabilities with similar terms. The estimated fair value approximates the carrying value for deposits with variable rates and fixed rates with three months or less to their maturity or repricing date.

Consolidated obligations. The Bank estimates the fair values of consolidated obligations by calculating the present value of expected future cash flows using discount rates that are based on replacement funding rates for liabilities with similar terms and reducing this amount for accrued interest payable. The inputs to the valuation are the CO curve and, for consolidated obligations containing options, swaption volatility.

Mandatorily redeemable capital stock. The fair value of capital stock subject to mandatory redemption is generally equal to its par value ($100 per share), as adjusted for any estimated dividend earned but unpaid at the time of reclassification from equity to liabilities. The Bank’s capital stock cannot, by statute or implementing regulation, be purchased, redeemed, repurchased or transferred at any amount other than its par value.

Commitments. The Bank determines the estimated fair values of optional commitments to fund advances by calculating the present value of expected future cash flows from the instruments using replacement advance rates for advances with similar terms and swaption volatility. The estimated fair value of the Bank’s other commitments to extend credit, including advances and letters of credit, was not material at June 30, 2012 or December 31, 2011.

The following table presents the carrying values and estimated fair values of the Bank’s financial instruments at June 30, 2012, as well as the level within the fair value hierarchy in which the measurements are classified (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level input that is significant to the fair value estimate.

FAIR VALUE SUMMARY TABLE

			Estimated Fair Value
Financial Instruments	Carrying Value		Total		Level 1		Level 2			Level 3			Netting Adjustment(4)
Assets:
Cash and due from banks	$	1,447,776	$	1,447,776	$	1,447,776	$	—		$	—		$	—
Interest-bearing deposits	308		308		—		308			—			—
Security purchased under agreement to resell	1,000,000		1,000,000		—		1,000,000			—			—
Federal funds sold	1,573,000		1,573,000		—		1,573,000			—			—
Trading securities (1)	6,976		6,976		6,976		—			—			—
Available-for-sale securities (1)	5,767,745		5,767,745		—		5,767,745			—			—
Held-to-maturity securities	5,457,479		5,522,105		—		5,317,782		(2)	204,323		(3)	—
Advances	19,207,379		19,409,508		—		19,409,508			—			—
Mortgage loans held for portfolio, net	140,443		155,796		—		155,796			—			—
Accrued interest receivable	74,974		74,974		—		74,974			—			—
Derivative assets (1)	18,758		18,758		—		156,031			—			(137,273		)
Liabilities:
Deposits	1,145,335		1,145,331		—		1,145,331			—			—
Consolidated obligations:
Discount notes	9,507,659		9,507,644		—		9,507,644			—			—
Bonds	22,049,307		22,231,526		—		22,231,526			—			—
Mandatorily redeemable capital stock	4,890		4,890		4,890		—			—			—
Accrued interest payable	66,579		66,579		—		66,579			—			—
Derivative liabilities (1)	180,268		180,268		—		1,406,591			—			(1,226,323		)
Optional advance commitments (other liabilities) (1)	133		133		—		133			—			—

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___________________________

⁽¹⁾  Financial instruments measured at fair value on a recurring basis as of June 30, 2012.

⁽²⁾  Consists of the Bank's holdings of U.S. government-guaranteed debentures, U.S. government-guaranteed MBS and GSE MBS.

⁽³⁾  Consists of the Bank's holdings of non-agency RMBS. During the three and six months ended June 30, 2012, the Bank recorded a total other-than-temporary impairment loss on one of its non-agency RMBS holdings. At June 30, 2012, this security had an unpaid principal balance and estimated fair value of $18,928,000 and $14,253,000, respectively. Four third-party vendor prices were received for this security and the average of the four prices was used to determine the final fair value measurement.

⁽⁴⁾  Amounts represent the impact of legally enforceable master netting agreements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

The carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2011 were as follows (in thousands):

FAIR VALUE SUMMARY TABLE

	December 31, 2011
	Carrying		Estimated
Financial Instruments	Value		Fair Value
Assets:
Cash and due from banks	$	1,152,467	$	1,152,467
Interest-bearing deposits	223		223
Security purchased under agreement to resell	500,000		500,000
Federal funds sold	1,645,000		1,645,000
Trading securities	6,034		6,034
Available-for-sale securities	4,927,697		4,927,697
Held-to-maturity securities	6,423,610		6,482,402
Advances	18,797,834		19,035,923
Mortgage loans held for portfolio, net	162,645		180,380
Loan to other FHLBank	35,000		35,000
Accrued interest receivable	72,584		72,584
Derivative assets	8,750		8,750
Liabilities:
Deposits	1,521,425		1,521,360
Consolidated obligations:
Discount notes	9,799,010		9,799,192
Bonds	20,070,056		20,298,273
Mandatorily redeemable capital stock	14,980		14,980
Accrued interest payable	65,451		65,451
Derivative liabilities	531,164		531,164
Optional advance commitments (other liabilities)	2,498		2,498

The following table summarizes the Bank’s assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2011 by their level within the fair value hierarchy (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level input that is significant to the fair value estimate.

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	Level 1		Level 2		Level 3		Netting Adjustment(1)			Total
Assets
Trading securities	$	6,034	$	—	$	—	$	—		$	6,034
Available-for-sale securities	—		4,927,697		—		—			4,927,697
Derivative assets	—		201,228		—		(192,478		)	8,750
Total assets at fair value	$	6,034	$	5,128,925	$	—	$	(192,478	)	$	4,942,481
Liabilities
Derivative liabilities	$	—	$	1,286,125	$	—	$	(754,961	)	$	531,164
Optional advance commitments (other liabilities)	—		2,498		—		—			2,498
Total liabilities at fair value	$	—	$	1,288,623	$	—	$	(754,961	)	$	533,662

_____________________________

⁽¹⁾  Amounts represent the impact of legally enforceable master netting agreements between the Bank and its derivative counterparties that allow the Bank to offset positive and negative positions as well as the cash collateral held or placed with those same counterparties.

As of June 30, 2012 and December 31, 2011, the Bank had entered into optional advance commitments with par values totaling $160,000,000 and $200,000,000, respectively, excluding commitments to fund CIP and EDP advances. Under each of these commitments, the Bank sold an option to a member that provides the member with the right to enter into an advance at a specified fixed rate and term on a specified future date, provided the member has satisfied all of the customary requirements for such advance. The Bank hedged these commitments through the use of interest rate swaptions, which are treated as economic hedges. The Bank has irrevocably elected to carry these optional advance commitments at fair value under the fair value option in an effort to mitigate the potential income statement volatility that can arise from economic hedging relationships. Unrealized gains and losses on optional advance commitments carried at fair value under the fair value option are reported in other income (loss) in the statements of income. The optional advance commitments are reported in other liabilities in the statements of condition. At June 30, 2012 and December 31, 2011, other liabilities included items with an aggregate carrying value of $45,545,000 and $28,235,000, respectively, that were not eligible for the fair value option.

Note 13—Commitments and Contingencies

Joint and several liability. The Bank is jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the 12 FHLBanks. At June 30, 2012, the par amount of the other 11 FHLBanks’ outstanding consolidated obligations was approximately $654 billion. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Agency determines that the primary obligor is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. If the Bank were to determine that a loss was probable under its joint and several liability and the amount of such loss could be reasonably estimated, the Bank would charge to income the amount of the expected loss. Based upon the creditworthiness of the other FHLBanks, the Bank currently believes that the likelihood of a loss arising from its joint and several liability is remote.

Other commitments and contingencies. At June 30, 2012 and December 31, 2011, the Bank had commitments to make additional advances totaling approximately $188,959,000 and $219,105,000, respectively. In addition, outstanding standby letters of credit totaled $2,944,010,000 and $3,321,123,000 at June 30, 2012 and December 31, 2011, respectively. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on these letters of credit (see Note 6).

At June 30, 2012 and December 31, 2011, the Bank had commitments to issue $160,000,000 and $70,000,000, respectively, of consolidated obligation bonds, all of which were hedged with associated interest rate swaps.

The Bank executes interest rate exchange agreements with large financial institutions with which it has bilateral collateral exchange agreements. As of June 30, 2012 and December 31, 2011, the Bank had pledged cash collateral of $1,090,602,000 and $563,148,000, respectively, to institutions that had credit risk exposure to the Bank related to interest rate exchange agreements. The pledged cash collateral (i.e., interest-bearing deposit asset) is netted against derivative assets and liabilities in

34

the statements of condition. In addition, at June 30, 2012 and December 31, 2011, the Bank had pledged available-for-sale securities with aggregate fair values of $182,881,000 and $512,474,000, respectively, as collateral to institutions that had credit risk exposure to the Bank related to interest rate exchange agreements. At June 30, 2012 and December 31, 2011, the credit risk exposure that the Bank's derivative counterparties had to the Bank related to interest rate exchange agreements (before consideration of pledged collateral) totaled $1,254,738,000 and $1,088,998,000, respectively.

In the ordinary course of its business, the Bank is subject to the risk that litigation may arise. Currently, the Bank is not a party to any material pending legal proceedings.

Note 14— Transactions with Shareholders

Affiliates of two of the Bank’s derivative counterparties (Citigroup and Wells Fargo) acquired member institutions on March 31, 2005 and October 1, 2006, respectively. Since the acquisitions were completed, the Bank has continued to enter into interest rate exchange agreements with Citigroup and Wells Fargo in the normal course of business and under the same terms and conditions as before. Effective October 1, 2006, Citigroup terminated the Ninth District charter of the affiliate that acquired the member institution and, as a result, an affiliate of Citigroup became a non-member shareholder of the Bank.

Note 15 — Transactions with Other FHLBanks

Occasionally, the Bank loans (or borrows) short-term federal funds to (or from) other FHLBanks. During the six months ended June 30, 2012 and 2011, interest income from loans to other FHLBanks totaled $744 and $1,000, respectively. The following table summarizes the Bank’s loans to other FHLBanks during the six months ended June 30, 2012 and 2011 (in thousands).

	Six Months Ended June 30,
	2012			2011
Balance at January 1,	$	35,000		$	—
Loans made to:
FHLBank of San Francisco	200,000			200,000
FHLBank of Atlanta	—			6,000
Collections from:
FHLBank of Topeka	(35,000		)	—
FHLBank of San Francisco	(200,000		)	(200,000		)
FHLBank of Atlanta	—			(6,000		)
Balance at June 30,	$	—		$	—

During the six months ended June 30, 2012 and 2011, interest expense on borrowings from other FHLBanks totaled $611 and $278, respectively. The following table summarizes the Bank’s borrowings from other FHLBanks during the six months ended June 30, 2012 and 2011 (in thousands).

	Six Months Ended June 30,
	2012			2011
Balance at January 1,	$	—		$	—
Borrowings from:
FHLBank of San Francisco	160,000			—
FHLBank of Indianapolis	—			50,000
FHLBank of Topeka	40,000			—
Repayments to:
FHLBank of San Francisco	(160,000		)	—
FHLBank of Indianapolis	—			(50,000		)
FHLBank of Topeka	(40,000		)	—
Balance at June 30,	$	—		$	—

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The Bank has, from time to time, assumed the outstanding debt of another FHLBank rather than issue new debt. In connection with these transactions, the Bank becomes the primary obligor for the transferred debt. During the three months ended March 31, 2011, the Bank assumed consolidated obligations from the FHLBank of New York with par amounts totaling $150,000,000. The net premium associated with these transactions totaled $17,381,000. The Bank did not assume any other debt from other FHLBanks during the six months ended June 30, 2012 or 2011.

Occasionally, the Bank transfers debt to other FHLBanks. In connection with these transactions, the assuming FHLBank becomes the primary obligor for the transferred debt. During the three months ended June 30, 2011, the Bank transferred a consolidated obligation with a par amount of $15,000,000 to the FHLBank of San Francisco. A gain of $32,000 was recognized on the transfer. The Bank did not transfer any other debt to other FHLBanks during the six months ended June 30, 2012 or 2011.

Note 16 — Accumulated Other Comprehensive Income (Loss)

The following table presents the changes in the components of accumulated other comprehensive income (loss) for the six months months ended June 30, 2012 and 2011 (in thousands).

	Net Unrealized Gains (Losses) on Available-for-Sale Securities (1)			Non-Credit Portion of Other-than-Temporary Impairment Losses on Held-to-Maturity Securities			Postretirement Benefits			Total Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2012	$	5,197		$	(51,429	)	$	617		$	(45,615	)
Other comprehensive income (loss)	(4,526		)	5,398			(35		)	837
Balance at June 30, 2012	$	671		$	(46,031	)	$	582		$	(44,778	)
Balance at January 1, 2011	$	—		$	(63,263	)	$	561		$	(62,702	)
Other comprehensive income (loss)	—			7,037			(30		)	7,007
Balance at June 30, 2011	$	—		$	(56,226	)	$	531		$	(55,695	)

_____________________________

⁽¹⁾ Net unrealized gains (losses) on available-for-sale securities are net of unrealized gains and losses relating to hedged interest rate risk included in net income.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes thereto included in “Item 1. Financial Statements.”

Forward-Looking Information

This quarterly report contains forward-looking statements that reflect current beliefs and expectations of the Federal Home Loan Bank of Dallas (the “Bank”) about its future results, performance, liquidity, financial condition, prospects and opportunities, including the prospects for the payment of future dividends. These statements are identified by the use of forward-looking terminology, such as “anticipates,” “plans,” “believes,” “could,” “estimates,” “may,” “should,” “would,” “will,” “might,” “expects,” “intends” or their negatives or other similar terms. The Bank cautions that forward-looking statements involve risks or uncertainties that could cause the Bank’s actual results to differ materially from those expressed or implied in these forward-looking statements, or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, undue reliance should not be placed on these statements.

These risks and uncertainties include, without limitation, evolving economic and market conditions, political events, and the impact of competitive business forces. The risks and uncertainties related to evolving economic and market conditions include, but are not limited to, changes in interest rates, changes in the Bank’s access to the capital markets, changes in the cost of the Bank’s debt, changes in the ratings on the Bank’s debt, adverse consequences resulting from a significant regional, national or global economic downturn (including, but not limited to, reduced demand for the Bank's products and services), credit and prepayment risks, or changes in the financial health of the Bank’s members or non-member borrowers. Among other things, political events could possibly lead to changes in the Bank’s regulatory environment or its status as a government-sponsored enterprise (“GSE”), or to changes in the regulatory environment for the Bank’s members or non-member borrowers. Risks and uncertainties related to competitive business forces include, but are not limited to, the potential loss of a significant amount of member borrowings through acquisitions or other means or changes in the relative competitiveness of the Bank’s products and services for member institutions. For a more detailed discussion of the risk factors applicable to the Bank, see “Item 1A — Risk Factors” in the Bank’s Annual Report on Form 10-K for the year ended December 31, 2011 which was filed with the Securities and Exchange Commission (“SEC”) on March 23, 2012 (the “2011 10-K”). The Bank undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason.

Overview

Business

The Bank is one of 12 district Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks” and, together with the Federal Home Loan Banks Office of Finance ("Office of Finance"), a joint office of the FHLBanks, the “FHLBank System”) that were created by the Federal Home Loan Bank Act of 1932, as amended. The FHLBanks serve the public by enhancing the availability of credit for residential mortgages, community lending, and targeted community development. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, is responsible for supervising and regulating the FHLBanks and the Office of Finance. The Finance Agency’s stated mission is to provide effective supervision, regulation and housing mission oversight of the FHLBanks to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market. Consistent with this mission, the Finance Agency establishes policies and regulations covering the operations of the FHLBanks.

The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the FHLBank System). The Bank’s primary business is lending relatively low cost funds (known as advances) to its member institutions, which include commercial banks, thrifts, insurance companies, credit unions, and Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994. While not members of the Bank, state and local housing authorities that meet certain statutory criteria may also borrow from the Bank. The Bank also maintains a portfolio of investments, the vast majority of which are highly rated, for liquidity purposes and to provide additional earnings. Additionally, the Bank holds interests in a small and declining portfolio of government-guaranteed/insured and conventional mortgage loans that were acquired during the period from 1998 to mid-2003 through the Mortgage Partnership Finance^® (“MPF”^®) Program offered by the FHLBank of Chicago. Shareholders’ return on their investment includes dividends (which are typically paid quarterly in the form of capital stock) and the value derived from access to the Bank’s products and services. Historically, the Bank has balanced the financial rewards to shareholders by seeking to pay a dividend that meets or exceeds the return on alternative short-term money market investments available to shareholders, while lending funds at the lowest rates expected to be compatible with that objective and its objective to build retained earnings over time.

37

The Bank’s capital stock is not publicly traded and can be held only by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other activity that remains outstanding or until any applicable stock redemption or withdrawal notice period expires. All members must hold stock in the Bank. The Bank’s capital stock has a par value of $100 per share and is purchased, redeemed, repurchased and transferred only at its par value. By regulation, the parties to a transaction involving the Bank's stock can include only the Bank and its member institutions (or non-member institutions or former members, as described above). While a member could transfer stock to another member of the Bank, that transfer could occur only upon approval of the Bank and then only at par value. Members may redeem excess stock, or withdraw from membership and redeem all outstanding capital stock, with five years’ written notice to the Bank.

The FHLBanks’ debt instruments (known as consolidated obligations) are their primary source of funds and are the joint and several obligations of all 12 FHLBanks. Consolidated obligations are issued through the Office of Finance acting as agent for the FHLBanks and generally are publicly traded in the over-the-counter market. The Bank records on its statements of condition only those consolidated obligations for which it is the primary obligor. Consolidated obligations are not obligations of the U.S. government and the U.S. government does not guarantee them. Consolidated obligations are currently rated Aaa/P-1 by Moody’s Investors Service (“Moody’s”) and AA+/A-1+ by Standard & Poor’s (“S&P”). Each of these nationally recognized statistical rating organizations (“NRSROs”) has assigned a negative outlook to its long-term rating on the consolidated obligations, consistent with its negative outlook on the long-term rating of the U.S. government. These ratings indicate that Moody’s and S&P have concluded that the FHLBanks have a very strong capacity to meet their commitments to pay principal and interest on consolidated obligations. The ratings also reflect the FHLBank System’s status as a GSE. Historically, the FHLBanks’ GSE status and very high credit ratings on consolidated obligations have provided the FHLBanks with excellent capital markets access. Deposits, other borrowings and the proceeds from capital stock issued to members are also sources of funds for the Bank.

In addition to ratings on the FHLBanks’ consolidated obligations, each FHLBank is rated individually by both S&P and Moody’s. These individual FHLBank ratings apply to the individual obligations of the respective FHLBanks, such as interest rate derivatives, deposits, and letters of credit. As of June 30, 2012, Moody’s had assigned a deposit rating of Aaa/P-1 to each of the FHLBanks. At that same date, each of the FHLBanks was rated AA+/A-1+ by S&P. On July 31, 2012, S&P corrected its long-term issuer credit rating on the FHLBank of Seattle by lowering it to AA from AA+. The outlook on each of the NRSRO’s long-term ratings of the individual FHLBanks is negative, consistent with each of the NRSRO's negative outlook on the long-term rating of the U.S. government.

Shareholders, bondholders and prospective shareholders and bondholders should understand that these credit ratings are not a recommendation to buy, hold or sell securities and they may be subject to revision or withdrawal at any time by the NRSRO. The ratings from each of the NRSROs should be evaluated independently.

The Bank conducts its business and fulfills its public purpose primarily by acting as a financial intermediary between its members and the capital markets. The intermediation of the timing, structure, and amount of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements, including interest rate swaps, caps and swaptions. The Bank’s interest rate exchange agreements are accounted for in accordance with the provisions of Topic 815 of the Financial Accounting Standards Board Accounting Standards Codification entitled “Derivatives and Hedging” (“ASC 815”).

The Bank defines “adjusted earnings” as net earnings exclusive of: (1) gains or losses on the sales of investment securities, if any; (2) gains or losses on the retirement or transfer of debt, if any; (3) prepayment fees on advances; (4) fair value adjustments (except for net interest settlements) associated with derivatives and hedging activities and assets and liabilities carried at fair value; and (5) realized gains and losses associated with early terminations of derivative transactions. The Bank’s adjusted earnings are generated primarily from net interest income and typically tend to rise and fall with the overall level of interest rates, particularly short-term money market rates. Because the Bank is a cooperatively owned wholesale institution, the spread component of its net interest income is much smaller than a typical commercial bank, and a relatively larger portion of its net interest income is derived from the investment of its capital. The Bank endeavors to maintain a fairly neutral interest rate risk profile. As a result, the Bank’s capital is effectively invested in shorter-term assets or assets with short repricing intervals, and its adjusted earnings and returns on capital stock (based on adjusted earnings) generally tend to track short-term interest rates.

The Bank’s profitability objective is to achieve a rate of return on members’ capital stock investment sufficient to allow the Bank to meet its retained earnings growth objectives and pay dividends on capital stock at rates that equal or exceed the average federal funds rate. The Bank’s quarterly dividends are based upon its operating results, shareholders’ average capital stock holdings and the average federal funds rate for the immediately preceding quarter. While the Bank has had a long-standing practice of paying quarterly dividends, future dividend payments cannot be assured.

The Bank operates in only one reportable segment. All of the Bank’s revenues are derived from U.S. operations.

38

The following table summarizes the Bank’s membership, by type of institution, as of June 30, 2012 and December 31, 2011.

MEMBERSHIP SUMMARY
	June 30, 2012	December 31, 2011
Commercial banks	718	724
Thrifts	76	78
Credit unions	88	84
Insurance companies	24	24
Community Development Financial Institutions	2	—
Total members	908	910
Housing associates	7	8
Non-member borrowers	9	9
Total	924	927
Community Financial Institutions (“CFIs”) (1)	735	747

_____________________________

⁽¹⁾  The figures presented above reflect the number of members that were Community Financial Institutions as of June 30, 2012 and December 31, 2011 based upon the definitions of Community Financial Institutions that applied as of those dates.

For 2012, Community Financial Institutions (“CFIs”) are defined to include all institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) with average total assets as of December 31, 2011, 2010 and 2009 of less than $1.076 billion. For 2011, CFIs were defined as FDIC-insured institutions with average total assets as of December 31, 2010, 2009 and 2008 of less than $1.041 billion.

Financial Market Conditions

Economic conditions in the United States continued to show signs of improvement during the first half of 2012. The gross domestic product increased at an annual rate of 1.5 percent during the second quarter of 2012, as compared to an annual rate of 2.0 percent during the first quarter of 2012 and an annual rate of 4.1 percent during the fourth quarter of 2011. The nationwide unemployment rate fell from 8.5 percent at the end of 2011 to 8.2 percent at both March 31, 2012 and June 30, 2012. While housing prices improved in several areas, many housing markets remain depressed. Despite some signs of economic improvement during the first half of the year, the sustainability and extent of those improvements, and the prospects for and potential timing of further improvements remain uncertain. In addition, continued concerns about the financial conditions of many of the European governments and the possibility of a European recession could negatively impact the U.S. economy.

Credit market conditions remained relatively stable during the first six months of 2012. Concerns over the sovereign debt crisis in Europe continued to result in high demand for high-quality debt, including FHLBank consolidated obligations.

In June 2012, the Federal Reserve announced that it would continue through the end of the year a program designed to extend the average maturity of its holdings of securities by purchasing longer-dated assets and selling shorter-dated assets. Under this maturity extension program, the Federal Reserve will continue to sell or redeem U.S. Treasury securities with maturities of approximately 3 years or less and replace them with U.S. Treasury securities with maturities of 6 to 30 years. The Federal Reserve also announced that it would maintain its existing policy of reinvesting the principal payments from its holdings of agency debt and agency mortgage-backed securities ("MBS") in agency MBS rather than U.S. Treasury securities and would suspend, for the duration of the maturity extension program, rolling over maturing treasury securities into new issues at auction.

The Federal Open Market Committee ("FOMC") maintained its target for the federal funds rate at a range between 0 and 0.25 percent throughout the first six months of 2012. The Federal Reserve stated at its June 2012 FOMC meeting that it currently anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. From 2009 through the second quarter of 2012, the Federal Reserve has paid interest on required and excess reserves held by depository institutions at a rate of 0.25 percent, equivalent to the upper boundary of the target range for federal funds. During this period, a significant and sustained increase in bank reserves combined with the rate of interest being paid on those reserves has contributed to a decline in the volume of transactions taking place in the overnight federal funds market and an effective federal funds rate that has generally been below the upper end of the targeted range.

39

One- and three-month LIBOR rates decreased slightly during the first half of 2012, with one- and three-month LIBOR ending the quarter at 0.25 percent and 0.46 percent, respectively, as compared to 0.30 percent and 0.58 percent, respectively, at the end of 2011. The following table presents information on various market interest rates at June 30, 2012 and December 31, 2011 and various average market interest rates for the three- and six-month periods ended June 30, 2012 and 2011.

	Ending Rate		Average Rate		Average Rate
	June 30, 2012	December 31, 2011	Second Quarter 2012	Second Quarter 2011	Six Months Ended June 30, 2012	Six Months Ended June 30, 2011
Federal Funds Target (1)	0.25%	0.25%	0.25%	0.25%	0.25%	0.25%
Average Effective
Federal Funds Rate (2)	0.09%	0.04%	0.15%	0.09%	0.13%	0.12%
1-month LIBOR (1)	0.25%	0.30%	0.24%	0.20%	0.25%	0.23%
3-month LIBOR (1)	0.46%	0.58%	0.47%	0.26%	0.49%	0.29%
2-year LIBOR (1)	0.55%	0.73%	0.59%	0.75%	0.59%	0.82%
5-year LIBOR (1)	0.97%	1.22%	1.08%	2.07%	1.13%	2.20%
10-year LIBOR (1)	1.78%	2.03%	1.95%	3.29%	2.03%	3.41%
3-month U.S. Treasury (1)	0.09%	0.02%	0.09%	0.05%	0.08%	0.09%
2-year U.S. Treasury (1)	0.33%	0.25%	0.29%	0.56%	0.29%	0.63%
5-year U.S. Treasury (1)	0.72%	0.83%	0.79%	1.85%	0.84%	1.99%
10-year U.S. Treasury (1)	1.67%	1.89%	1.83%	3.20%	1.93%	3.33%

_____________________________

⁽¹⁾  Source: Bloomberg

⁽²⁾  Source: Federal Reserve Statistical Release

Year-to-Date 2012 Summary

• The Bank ended the second quarter of 2012 with total assets of $34.7 billion compared with $33.8 billion at the end of 2011. The $0.9 billion increase in total assets during the six-month period was attributable primarily to a $0.8 billion increase in the Bank's long-term available-for-sale securities portfolio, a $0.7 billion increase in the Bank's short-term liquidity portfolio and a $0.4 billion increase in advances, partially offset by a $1.0 billion decrease in the Bank's long-term held-to-maturity securities portfolio.

• Total advances at June 30, 2012 were $19.2 billion, a slight increase from $18.8 billion at the end of 2011. The Bank's lending activities remained subdued during the first half of 2012 due largely to continued high liquidity levels and weak demand for loans at member institutions.

• The Bank’s net income for the three and six months ended June 30, 2012 was $22.5 million and $46.8 million, respectively, including net interest income of $40.6 million and $81.2 million, respectively, and $(0.04) million and $2.54 million in net gains (losses) on derivatives and hedging activities, respectively. The Bank’s net interest income excludes net interest settlements associated with economic hedge derivatives, which also contributed to the Bank’s overall income before assessments of $25.0 million and $52.0 million for the three and six months ended June 30, 2012, respectively. Had the interest income on economic hedge derivatives been included in net interest income, the Bank's net interest income would have been higher (and its net gains/losses on derivatives and hedging activities would have been negatively impacted) by $2.9 million and $5.9 million for the three and six months ended June 30, 2012, respectively.

• For the three and six months ended June 30, 2012, the $(0.04) million and $2.5 million, respectively, in net gains (losses) on derivatives and hedging activities included $2.9 million and $5.9 million, respectively, of net interest income on interest rate swaps accounted for as economic hedge derivatives, $1.2 million and $1.0 million, respectively, of net losses on economic hedge derivatives (excluding net interest settlements) and net ineffectiveness-related losses on fair value hedges of $1.7 million and $2.4 million, respectively.

• The Bank held $5.6 billion (notional) of interest rate swaps and swaptions recorded as economic hedge derivatives with a net positive fair value of $21.6 million (excluding accrued interest) at June 30, 2012. If these derivatives are held to maturity, their values will ultimately decline to zero and be recorded as losses in future periods. The timing of these losses will depend upon a number of factors including the relative level and volatility of future interest rates. In addition, as of June 30, 2012, the Bank held $3.9 billion (notional) of stand-alone interest rate cap agreements with a fair value of $1.0 million that hedge a portion of the interest rate risk posed by interest rate caps embedded in its

40

collateralized mortgage obligation (“CMO”) LIBOR floaters. If these agreements are held to maturity, the value of the caps will ultimately decline to zero and be recorded as a loss in net gains (losses) on derivatives and hedging activities in future periods.

• Unrealized losses on the Bank’s holdings of non-agency residential MBS ("RMBS"), all of which are classified as held-to-maturity, totaled $70.4 million (26 percent of amortized cost) at June 30, 2012, as compared to $83.1 million (27 percent of amortized cost) at December 31, 2011. Based on its quarter-end analysis of the 32 securities in this portfolio, the Bank believes that the unrealized losses were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.

• The Bank’s operating results for the three and six months ended June 30, 2012 included credit-related other-than-temporary impairment charges of $0.1 million and $0.4 million, respectively, on two of its investments in non-agency RMBS. For a discussion of the Bank’s analysis, see “Item 1. Financial Statements” (specifically, Note 4 beginning on page 11 of this report). If the actual and/or projected performance of the loans underlying the Bank’s holdings of non-agency RMBS deteriorates beyond management's current expectations, the Bank could recognize further losses on the securities that it has already determined to be other-than-temporarily impaired and/or losses on its other investments in non-agency RMBS.

• At all times during the first six months of 2012, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s retained earnings increased to $539.1 million at June 30, 2012 from $494.7 million at December 31, 2011.

• During the first six months of 2012, the Bank paid dividends totaling $2.3 million; the Bank’s first and second quarter dividends were paid at an annualized rate of 0.375 percent, which exceeded the upper end of the Federal Reserve’s target for the federal funds rate of 0.25 percent for each of the preceding quarters by 12.5 basis points.

• While the Bank cannot predict how long the current economic conditions will continue, it expects that its lending activities may be subdued for some period of time and, therefore, its future adjusted earnings will likely be lower than they would have been otherwise. However, the Bank expects that its ability to adjust its capital levels in response to changes in the amount of advances outstanding combined with the accumulation of retained earnings in recent years will help to mitigate the negative impact that the subdued lending activity would otherwise be expected to have on the Bank’s shareholders. While there can be no assurances, based on its current expectations the Bank anticipates that its earnings will be sufficient both to continue paying quarterly dividends at a rate equal to or slightly above the average federal funds rate and to continue building retained earnings for the foreseeable future. In addition, the Bank currently expects to continue its quarterly repurchases of surplus stock.

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Selected Financial Data

SELECTED FINANCIAL DATA

(dollars in thousands)

	2012						2011
	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter
Balance sheet (at quarter end)
Advances	$	19,207,379		$	18,171,626		$	18,797,834		$	18,648,722		$	19,684,428
Investments (1)	13,805,508			13,461,626			13,537,564			11,250,626			9,285,616
Mortgage loans	140,633			152,182			162,837			173,587			184,126
Allowance for credit losses on mortgage loans	190			190			192			209			218
Total assets	34,728,987			34,190,186			33,769,967			31,427,316			31,387,759
Consolidated obligations — discount notes	9,507,659			8,564,746			9,799,010			7,977,769			2,849,954
Consolidated obligations — bonds	22,049,307			21,570,440			20,070,056			19,423,747			25,124,418
Total consolidated obligations(2)	31,556,966			30,135,186			29,869,066			27,401,516			27,974,372
Mandatorily redeemable capital stock(3)	4,890			4,873			14,980			7,604			17,176
Capital stock — putable	1,204,441			1,245,409			1,255,793			1,243,943			1,284,559
Unrestricted retained earnings	523,851			506,992			488,739			475,700			467,503
Restricted retained earnings	15,273			10,771			5,918			2,360			—
Retained earnings	539,124			517,763			494,657			478,060			467,503
Accumulated other comprehensive loss	(44,778		)	(39,577		)	(45,615		)	(58,222		)	(55,695		)
Total capital	1,698,787			1,723,595			1,704,835			1,663,781			1,696,367
Dividends paid(3)	1,146			1,162			1,194			1,241			1,393
Income statement (for the quarter)
Net interest income (4)	$	40,557		$	40,646		$	37,584		$	34,871		$	37,403
Other income (loss)	2,650			5,429			1,133			(2,595		)	(9,188		)
Other expense	18,198			19,110			18,948			19,166			19,148
Assessments (5)	2,502			2,697			1,978			1,312			2,359
Net income	22,507			24,268			17,791			11,798			6,708
Performance ratios
Net interest margin(6)	0.46		%	0.48		%	0.46		%	0.43		%	0.47		%
Return on average assets	0.26			0.28			0.21			0.14			0.08
Return on average equity	5.38			5.79			4.24			2.78			1.54
Return on average capital stock (7)	7.66			7.96			5.74			3.70			2.02
Total average equity to average assets	4.81			4.91			5.03			5.18			5.47
Regulatory capital ratio(8)	5.03			5.17			5.23			5.50			5.64
Dividend payout ratio (3)(9)	5.09			4.79			6.71			10.52			20.77
Average effective federal funds rate(10)	0.15		%	0.10		%	0.08		%	0.08		%	0.09		%

_____________________________

⁽¹⁾  Investments consist of federal funds sold, interest-bearing deposits, securities purchased under agreements to resell, loans to other FHLBanks and securities classified as held-to-maturity, available-for-sale, and trading.

⁽²⁾  The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all of the FHLBanks. At June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, and June 30, 2011, the outstanding consolidated obligations (at par value) of all 12 FHLBanks totaled approximately $685 billion, $658 billion, $692 billion, $697 billion, and $727 billion, respectively. As of those dates, the Bank’s outstanding consolidated obligations (at par value) were $31 billion, $30 billion, $30 billion, $27 billion, and $28 billion, respectively.

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⁽³⁾  Mandatorily redeemable capital stock represents capital stock that is classified as a liability under generally accepted accounting principles. Dividends on mandatorily redeemable capital stock are recorded as interest expense and excluded from dividends paid. Dividends paid on mandatorily redeemable capital stock totaled $7 thousand, $11 thousand, $12 thousand, $16 thousand, and $18 thousand for the quarters ended June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, and June 30, 2011, respectively.

⁽⁴⁾  Net interest income excludes the net interest income/expense associated with interest rate exchange agreements that do not qualify for hedge accounting. The net interest income associated with such agreements totaled $2.9 million, $2.9 million, $2.2 million, $1.3 million, and $1.4 million for the quarters ended June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, and June 30, 2011, respectively.

⁽⁵⁾  Beginning July 1, 2011, the Bank's earnings are no longer reduced by a REFCORP assessment. For additional information, see the 2011 10-K.

⁽⁶⁾  Net interest margin is net interest income as a percentage of average earning assets.

⁽⁷⁾  Return on average capital stock is derived by dividing net income by average capital stock balances excluding mandatorily redeemable capital stock.

⁽⁸⁾  The regulatory capital ratio is computed by dividing regulatory capital (the sum of capital stock — putable, mandatorily redeemable capital stock and retained earnings) by total assets at each quarter-end.

⁽⁹⁾  Dividend payout ratio is computed by dividing dividends paid by net income for each quarter.

⁽¹⁰⁾  Rates obtained from the Federal Reserve Statistical Release.

Legislative and Regulatory Developments

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, the President of the United States signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act makes significant changes to a number of aspects of the regulation of financial institutions. Although the FHLBanks were exempted from several provisions of the Dodd-Frank Act, the Bank's business operations, hedging costs, rights, obligations, and/or the environment in which it carries out its housing finance mission are likely to be affected by the Dodd-Frank Act. Certain regulatory actions resulting from the Dodd-Frank Act that may have a significant impact on the Bank are summarized in the Bank's 2011 10-K (see “Business - Legislative and Regulatory Developments” beginning on page 17 of that report). The more significant regulatory activities relating to the Dodd-Frank Act that have occurred since the Bank's 2011 10-K was filed are summarized below and should be read in conjunction with the summary included in that report. Because the Dodd-Frank Act requires the issuance of numerous regulations, orders, determinations and reports, the full effect of this legislation on the Bank and its activities will become known only after the required regulations, orders, determinations and reports have been issued and implemented.

On April 11, 2012, the Financial Stability Oversight Council (the “Oversight Council”) issued a final rule and accompanying guidance regarding the standards and procedures that it will follow in determining whether to designate a nonbank financial company for supervision by the Federal Reserve Board and in so doing subject that company to certain heightened prudential standards. The guidance issued with the final rule, which became effective on May 11, 2012, provides that the Oversight Council generally expects in making its determinations to follow a process consisting of: (1) a first stage that will identify those U.S. nonbank financial companies that have $50 billion or more of total consolidated assets and which exceed any one of five other quantitative threshold indicators of interconnectedness or susceptibility to material financial distress, including whether a company has $20 billion or more in total debt outstanding; (2) a second stage that will involve an analysis of the potential threat that the subject nonbank financial company could pose to the financial stability of the United States based on additional quantitative and qualitative factors that are industry and company specific; and (3) a third stage that will involve an analysis of the subject nonbank financial company using information collected directly from the company. It is not clear whether the quantitative thresholds will be applied to each FHLBank individually or to all 12 FHLBanks collectively. At June 30, 2012, the Bank's total assets approximated $35 billion while the 12 FHLBanks had total assets aggregating $760 billion. At that same date, the Bank's outstanding consolidated obligations and the outstanding consolidated obligations of the 12 FHLBanks totaled $31 billion and $685 billion, respectively.

The final rule provides that the Oversight Council will consider as one factor when making its determinations whether the nonbank financial company is subject to oversight by a primary financial regulatory agency (in the case of the Bank, the Finance Agency). Under the rule, a nonbank financial company that the Oversight Council proposes to designate for additional supervision and prudential standards will have the opportunity to contest the designation. If the Bank is designated by the Oversight Council for supervision by the Federal Reserve Board and is subject to additional prudential standards, then the Bank's operations and business could be adversely affected by additional costs and potential restrictions on its business activities.

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On April 18, 2012, the Commodity Futures Trading Commission (the “CFTC”) and the SEC finalized their joint rules further defining “swap dealers” and “major swap participants.” Based on the definitions in the final rules, the Bank will not be required to register as a “major swap participant” nor will it be required to register as a “swap dealer” with respect to: (1) the derivative transactions that it enters into with its non-member derivative counterparties for the purpose of hedging and managing its interest rate risk or (2) the intermediated derivative transactions that it enters into with its members.

Based upon final rules and accompanying interpretive guidance that were issued jointly by the CFTC and the SEC on July 10, 2012, the call and put features embedded in some of the Bank's advances will not be treated as “swaps” provided the features relate solely to interest rates and do not result in enhanced or inverse performance or other risks unrelated to interest rates. Accordingly, the Bank's ability to offer these types of advances to members should not be affected by the new derivatives regulation.

As a result of new statutory and regulatory requirements imposed by the Dodd-Frank Act, certain of the Bank's derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. Cleared trades will be subject to initial and variation margin requirements established by the clearinghouse and its clearing members.

On July 10, 2012, the CFTC finalized an end-user exception to mandatory clearing. While the end-user exception will not apply to the derivative transactions that the Bank enters into to hedge and manage its interest rate risk, it will apply to any intermediated derivative transactions that the Bank enters into with its members as long as the member has $10 billion or less in assets, the derivatives are used to hedge or mitigate the member's commercial risk, and the Bank (or the member) complies with the rule's additional reporting requirements. As a result, any such intermediated derivative transactions will not be subject to mandatory clearing, although such derivatives will be subject to applicable requirements for uncleared trades.

The Dodd-Frank Act will also change the regulatory landscape for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to be able to continue to enter into uncleared trades on a bilateral basis, those trades will be subject to new regulatory requirements, including mandatory reporting requirements, documentation requirements, and minimum margin and capital requirements.

The CFTC, the SEC and the Finance Agency are expected to continue to issue final rulemakings related to derivative transactions through the end of 2012.

Many of the provisions of the Dodd-Frank Act relating to derivatives that are expected to have the most effect on the Bank's derivative transactions will take effect on a date determined by the CFTC, which must be no less than 60 days after the CFTC publishes final regulations implementing such provisions. Compliance dates for certain of these rulemakings that have been finalized and published by the CFTC, including new recordkeeping and reporting requirements, are based on the effectiveness of the final rules jointly issued by the CFTC and the SEC further defining the term “swap.” Such final rules were issued on July 10, 2012 but have not yet been published in the Federal Register and such rules will not become effective until at least 60 days after they are published in the Federal Register. The implementation timeframe for mandatory clearing of eligible interest rate derivatives is based on the effectiveness of the CFTC's eligibility determinations. The eligibility determinations for interest rate swaps were set forth in a notice of proposed rulemaking that was published in the Federal Register on August 7, 2012. The CFTC is expected to finalize these determinations within 90 days after August 7, 2012, and the Bank will have to clear eligible interest rate derivatives within 180 days thereafter. Currently, it is expected that the Bank will have to comply with the mandatory clearing requirements and the new regulatory requirements for uncleared trades beginning in the second quarter of 2013.

Finance Agency Actions

On June 8, 2012, the Finance Agency issued a final rule, as required by the Housing and Economic Recovery Act of 2008, regarding prudential standards for the operation and management of the FHLBanks, including, among others, prudential standards for internal controls and information systems, internal audit systems, market and interest rate risks, liquidity, asset growth, investments, credit and counterparty risk management, and records maintenance. Under the rule, which became effective on August 7, 2012, a FHLBank that fails to meet a prudential standard is required to file a corrective action plan with the Finance Agency within 30 calendar days of being notified by the Finance Agency of the need to file such a plan, unless the Finance Agency notifies the FHLBank that the plan must be filed within a different time period. If an acceptable corrective action plan is not submitted by the deadline or the terms of such plan are not complied with in any material respect, the Director of the Finance Agency can impose sanctions on the FHLBank, such as limits on its asset growth, increases in the level of its retained earnings, and prohibitions on its dividends or the redemption or repurchase of its capital stock.

44

Other Developments

In September 2010, the Basel Committee approved a new capital framework for internationally active banks. Institutions that are subject to the new framework will be required to have increased amounts of capital with core capital being more strictly defined to include only common equity and other capital assets that are able to fully absorb losses.

On June 7, 2012, the Federal Reserve Board,the Office of the Comptroller of the Currency and the FDIC (the “Agencies”) concurrently published three joint notices of proposed rulemaking (the “NPRs”) seeking comments on comprehensive revisions to the Agencies' capital framework to incorporate the Basel Committee's new capital framework.

These revisions would, among other things:

• implement the Basel Committee's capital standards related to minimum requirements, regulatory capital and additional capital buffers;

• revise the methodologies for calculating risk-weighted assets in the general risk-based capital rules; and

• revise the approach by which large banks determine their capital adequacy.

The NPRs do not incorporate the reforms related to liquidity risk management published in Basel III, which the Agencies are expected to propose in a separate rulemaking.

If the new NPRs are adopted as proposed and depending upon the liquidity framework expected to be proposed by the Agencies, some of the Bank's members could be required to divest assets in order to comply with the more stringent capital and liquidity requirements, thereby potentially decreasing their need for advances. Alternatively, the new framework could provide an incentive to members to use term advances to create balance sheet liquidity. Any new liquidity requirements may also adversely affect investor demand for consolidated obligations.

Financial Condition

The following table provides selected period-end balances as of June 30, 2012 and December 31, 2011, as well as selected average balances for the six-month period ended June 30, 2012 and the year ended December 31, 2011. As shown in the table, the Bank’s total assets increased by 2.8 percent (or $1.0 billion) between December 31, 2011 and June 30, 2012, due primarily to increases of $0.4 billion, $0.8 billion and $0.7 billion in advances, available-for-sale securities and its short-term liquidity holdings, respectively, offset by a decline of $1.0 billion in held-to-maturity securities. As the Bank’s assets increased, the funding for those assets also increased. During the six months ended June 30, 2012, total consolidated obligations increased by $1.7 billion as consolidated obligation bonds increased by $2.0 billion and consolidated obligation discount notes decreased by $0.3 billion.

The activity in each of the major balance sheet captions is discussed in the sections following the table.

45

SUMMARY OF CHANGES IN FINANCIAL CONDITION

(dollars in millions)

	June 30, 2012
			Increase (Decrease)					Balance at December 31, 2011
	Balance		Amount			Percentage
Advances	$	19,207	$	409		2.2	%	$	18,798
Short-term liquidity holdings
Non-interest bearing excess cash balances (1)	1,410		280			24.8	%	1,130
Securities purchased under agreements to resell	1,000		500			100.0	%	500
Federal funds sold	1,573		(72		)	(4.4	)%	1,645
Loan to other FHLBank	—		(35		)	(100.0	)%	35
Long-term investments
Available-for-sale securities	5,768		840			17.0	%	4,928
Held-to-maturity securities	5,457		(967		)	(15.1	)%	6,424
Mortgage loans, net	140		(23		)	(14.1	)%	163
Total assets	34,729		959			2.8	%	33,770
Consolidated obligations — bonds	22,049		1,979			9.9	%	20,070
Consolidated obligations — discount notes	9,508		(291		)	(3.0	)%	9,799
Total consolidated obligations	31,557		1,688			5.7	%	29,869
Mandatorily redeemable capital stock	5		(10		)	(66.7	)%	15
Capital stock	1,204		(52		)	(4.1	)%	1,256
Retained earnings	539		44			8.9	%	495
Average total assets	34,655		1,259			3.8	%	33,396
Average capital stock	1,204		(128		)	(9.6	)%	1,332
Average mandatorily redeemable capital stock	6		(8		)	(57.1	)%	14

_____________________________

⁽¹⁾  Represents excess cash held at the Federal Reserve Bank of Dallas. These amounts are classified as “Cash and due from banks” in the Bank’s statements of condition.

46

Advances

The Bank's lending activities remained subdued during the first half of 2012. The Bank believes that the low demand for advances was due largely to members’ continued high liquidity levels, which are primarily the result of high deposit levels, and subdued lending activity due to weak economic conditions. The following table presents advances outstanding, by type of institution, as of June 30, 2012 and December 31, 2011.

ADVANCES OUTSTANDING BY BORROWER TYPE

(par value, dollars in millions)

	June 30, 2012				December 31, 2011
	Amount		Percent		Amount		Percent
Commercial banks	$	14,348	77	%	$	13,092	72	%
Thrift institutions	2,586		14		3,486		19
Credit unions	1,191		6		1,162		6
Insurance companies	445		2		353		2
Total member advances	18,570		99		18,093		99
Housing associates	77		1		107		1
Non-member borrowers	43		—		79		—
Total par value of advances	$	18,690	100	%	$	18,279	100	%
Total par value of advances outstanding to CFIs (1)	$	5,896	32	%	$	6,044	33	%

_____________________________

⁽¹⁾  The figures presented above reflect the advances outstanding to CFIs as of June 30, 2012 and December 31, 2011 based upon the definitions of CFIs that applied as of those dates.

At June 30, 2012, advances outstanding to the Bank’s five largest borrowers totaled $5.6 billion, representing 30.2 percent of the Bank’s total outstanding advances as of that date. In comparison, advances outstanding to the Bank’s five largest borrowers as of December 31, 2011 totaled $5.4 billion, representing 29.8 percent of the total outstanding balances at that date. The following table presents the Bank’s five largest borrowers as of June 30, 2012.

FIVE LARGEST BORROWERS AS OF JUNE 30, 2012

(par value, dollars in millions)

Name	Par Value of Advances		Percent of Total Par Value of Advances
Comerica Bank	$	2,000	10.7	%
Texas Capital Bank, N.A.	1,300		7.0
ViewPoint Bank, N.A.	879		4.7
Beal Bank USA	860		4.6
Southside Bank	608		3.2
	$	5,647	30.2	%

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The following table presents information regarding the composition of the Bank’s advances by product type as of June 30, 2012 and December 31, 2011.

ADVANCES OUTSTANDING BY PRODUCT TYPE

(par value, dollars in millions)

	June 30, 2012				December 31, 2011
	Balance		Percentage of Total		Balance		Percentage of Total
Fixed rate	$	14,148	75.7	%	$	13,662	74.7	%
Adjustable/variable rate indexed	2,068		11.1		2,100		11.5
Amortizing	2,474		13.2		2,517		13.8
Total par value	$	18,690	100.0	%	$	18,279	100.0	%

The Bank is required by statute and regulation to obtain sufficient collateral from members/borrowers to fully secure all advances and other extensions of credit. The Bank’s collateral arrangements with its members/borrowers and the types of collateral it accepts to secure advances are described in the 2011 10-K. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances, the Bank applies various haircuts, or discounts, to determine the value of the collateral against which borrowers may borrow. From time to time, the Bank reevaluates the adequacy of its collateral haircuts under a range of stress scenarios to ensure that its collateral haircuts are sufficient to protect the Bank from credit losses on advances.

In addition, as described in the 2011 10-K, the Bank reviews the financial condition of its depository institution borrowers on at least a quarterly basis to identify any borrowers whose financial condition indicates they might pose an increased credit risk and, as needed, takes appropriate action. The Bank has not experienced any credit losses on advances since it was founded in 1932 and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on advances. Accordingly, the Bank has not provided any allowance for losses on advances.

Short-Term Liquidity Portfolio

At June 30, 2012, the Bank’s short-term liquidity portfolio was comprised of $1.6 billion of overnight federal funds sold to domestic bank counterparties, a $1.0 billion overnight reverse repurchase agreement and $1.4 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas. All of the Bank's federal funds sold during the six months ended June 30, 2012 were transacted with domestic bank counterparties on an overnight basis. At December 31, 2011, the Bank’s short-term liquidity portfolio was comprised of $1.6 billion of overnight federal funds sold to domestic bank counterparties, $1.1 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas, a $0.5 billion overnight reverse repurchase agreement and $35 million of overnight federal funds sold to another FHLBank. As of June 30, 2012, the Bank’s overnight federal funds sold consisted of $0.5 billion sold to counterparties rated double-A, $0.6 billion sold to counterparties rated single-A and $0.5 billion sold to counterparties rated triple-B. The security purchased under an agreement to resell was purchased from a counterparty rated single-A. The credit ratings presented in the two preceding sentences represent the lowest long-term rating assigned to the counterparty by Moody’s, S&P or Fitch Ratings, Ltd. (“Fitch”). The amount of the Bank’s short-term liquidity portfolio fluctuates in response to several factors, including the anticipated demand for advances, the timing and extent of advance prepayments, changes in the Bank’s deposit balances, the Bank’s pre-funding activities, changes in the returns provided by short-term investment alternatives relative to the Bank’s discount note funding costs, and the level of liquidity needed to satisfy Finance Agency requirements. (For a discussion of the Finance Agency’s liquidity requirements, see the section below entitled “Liquidity and Capital Resources.”)

48

Long-Term Investments

The composition of the Bank's long-term investment portfolio at June 30, 2012 and December 31, 2011 is set forth in the table below.

COMPOSITION OF LONG-TERM INVESTMENT PORTFOLIO

(in millions of dollars)

	Balance Sheet Classification				Total Long-Term
	Held-to-Maturity		Available-for-Sale		Investments		Held-to-Maturity
June 30, 2012	(at carrying value)		(at fair value)		(at carrying value)		(at fair value)
Debentures
U.S. government-guaranteed obligations	$	42	$	56	$	98	$	42
Government-sponsored enterprises	—		5,254		5,254		—
Other	—		458		458		—
Total debentures	42		5,768		5,810		42
MBS portfolio
U.S. government-guaranteed obligations	15		—		15		15
Government-sponsored enterprises	5,172		—		5,172		5,261
Non-agency RMBS	228		—		228		204
Total MBS	5,415		—		5,415		5,480
Total long-term investments	$	5,457	$	5,768	$	11,225	$	5,522
	Balance Sheet Classification				Total Long-Term
	Held-to-Maturity		Available-for-Sale		Investments		Held-to-Maturity
December 31, 2011	(at carrying value)		(at fair value)		(at carrying value)		(at fair value)
Debentures
U.S. government-guaranteed obligations	$	45	$	55	$	100	$	45
Government-sponsored enterprises	—		4,648		4,648		—
Other	—		225		225		—
Total debentures	45		4,928		4,973		45
MBS portfolio
U.S. government-guaranteed obligations	17		—		17		17
Government-sponsored enterprises	6,109		—		6,109		6,199
Non-agency RMBS	252		—		252		221
Total MBS	6,378		—		6,378		6,437
Total long-term investments	$	6,423	$	4,928	$	11,351	$	6,482

As of June 30, 2012, the U.S. government and the issuers of the Bank's holdings of GSE debentures and GSE MBS were rated triple-A by Moody's and Fitch and AA+ by S&P. The Bank's holdings of other debentures were rated Aaa by Moody's and AA+ by S&P; the other debentures were not rated by Fitch.

During the six months ended June 30, 2012, the Bank acquired $800 million (based on trade date) of GSE and other highly-rated debentures, all of which were hedged with fixed-for-floating interest rate swaps. Because ASC 815 does not allow hedge accounting treatment for fair value hedges of investment securities designated as held-to-maturity, all of these securities were

49

classified as available-for-sale. The Bank did not sell any long-term investments during the six months ended June 30, 2012. During this same six-month period, the proceeds from maturities and paydowns of held-to-maturity securities totaled approximately $1.0 billion.

The Bank is currently precluded from purchasing additional MBS if such purchase would cause the aggregate amortized cost of its MBS holdings to exceed 300 percent of the Bank’s total regulatory capital (the sum of its capital stock — putable, mandatorily redeemable capital stock and retained earnings). At June 30, 2012, the Bank held $5.5 billion (amortized cost) of MBS, which represented 312 percent of its total regulatory capital as of that date. The Bank is not required to sell any previously purchased mortgage securities as it was in compliance with the applicable limit at the time of purchase. The Bank does not currently anticipate that it will have the capacity to purchase additional MBS until the fourth quarter of 2012. In addition, the Bank currently has capacity under applicable policies and regulations to purchase certain other types of highly rated long-term investments similar to those it acquired during the six months ended June 30, 2012. In July 2012, the Bank purchased $7.1 million of additional long-term GSE debentures; these investments were hedged with fixed-for-floating interest rate swaps and classified as available-for-sale. The Bank does not currently expect to purchase any additional debentures during the remainder of 2012.

The following table provides the unpaid principal balances of the Bank’s MBS portfolio, by coupon type, as of June 30, 2012 and December 31, 2011.

UNPAID PRINCIPAL BALANCE OF MBS BY COUPON TYPE

(in millions of dollars)

	June 30, 2012						December 31, 2011
	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
U.S. government-guaranteed obligations	$	—	$	15	$	15	$	—	$	17	$	17
Government-sponsored enterprises	2		5,236		5,238		2		6,186		6,188
Non-agency RMBS
Prime(1)	—		229		229		—		253		253
Alt-A(1)	—		59		59		—		64		64
Total MBS	$	2	$	5,539	$	5,541	$	2	$	6,520	$	6,522

_____________________________

⁽¹⁾   Reflects the label assigned to the securities by the originator at the time of issuance.

Gross unrealized losses on the Bank’s MBS investments decreased from $85.8 million at December 31, 2011 to $71.0 million at June 30, 2012. As of June 30, 2012, $70.4 million (or 99 percent) of the unrealized losses related to the Bank’s holdings of non-agency RMBS.

The Bank evaluates outstanding held-to-maturity and available-for-sale investment securities in an unrealized loss position as of the end of each quarter for other-than-temporary impairment (“OTTI”). An investment security is impaired if the fair value of the investment is less than its amortized cost. For a summary of the Bank’s OTTI evaluation, see “Item 1. Financial Statements” (specifically, Notes 3 and 4 beginning on pages 9 and 11, respectively, of this report).

The deterioration in the U.S. housing markets since 2007, as reflected by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency RMBS, has generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. However, based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of June 30, 2012 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.

All of the Bank’s non-agency RMBS are rated by one or more of the following NRSROs: Moody’s, S&P and/or Fitch. The following table presents the credit ratings assigned to the Bank’s non-agency RMBS holdings as of June 30, 2012. The credit ratings presented in the following table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch.

50

NON-AGENCY RMBS CREDIT RATINGS

(dollars in thousands)

Credit Rating	Number of Securities	Unpaid Principal Balance		Amortized Cost		Carrying Value		Estimated Fair Value		Unrealized Losses
Triple-A	8	$	42,403	$	42,408	$	42,408	$	40,159	$	2,249
Double-A	1	47		47		47		47		—
Triple-B	1	4,025		4,027		4,027		3,752		275
Single-B	10	85,494		85,153		77,652		61,212		23,941
Triple-C	11	127,169		119,216		86,665		79,365		39,851
Single-C	1	28,716		23,848		17,869		19,788		4,060
Total	32	$	287,854	$	274,699	$	228,668	$	204,323	$	70,376

As of June 30, 2012, one security rated triple-A, five securities rated single-B and two securities rated triple-C in the table above were on negative watch. At that date, these securities had amortized costs of $1.5 million, $40.3 million and $24.8 million, respectively, and estimated fair values of $1.4 million, $29.8 million and $18.5 million, respectively. During the period from July 1, 2012 through July 31, 2012, one security rated single-B in the table above was downgraded to triple-C by one of the NRSROs; at June 30, 2012 this security had an amortized cost and estimated fair value of $18.7 million and $14.3 million, respectively. No additional securities were placed on negative watch during the period from July 1, 2012 through July 31, 2012.

At June 30, 2012, the Bank’s portfolio of non-agency RMBS was comprised of 13 securities with an aggregate unpaid principal balance of $95 million that are backed by first lien fixed-rate loans and 19 securities with an aggregate unpaid principal balance of $193 million that are backed by first lien option adjustable-rate mortgage (“option ARM”) loans. In comparison, as of December 31, 2011, the Bank’s non-agency RMBS portfolio was comprised of 15 securities backed by fixed-rate loans that had an aggregate unpaid principal balance of $114 million and 19 securities backed by option ARM loans that had an aggregate unpaid principal balance of $203 million. Two of the Bank’s unimpaired non-agency RMBS were paid in full during the six months ended June 30, 2012. The following table provides a summary of the Bank’s non-agency RMBS as of June 30, 2012 by classification by the originator at the time of issuance, collateral type and year of securitization; the Bank does not hold any MBS that were labeled as subprime by the originator at the time of issuance.

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NON-AGENCY RMBS BY UNDERLYING COLLATERAL TYPE

(dollars in millions)

												Credit Enhancement Statistics
Classification and Year of Securitization	Number of Securities	Unpaid Principal Balance		Amortized Cost		Estimated Fair Value		Unrealized Losses		Weighted Average Collateral Delinquency(1)(2)		Current Weighted Average (1)(3)		Original Weighted Average(1)		Minimum Current(4)
Prime(5)
Fixed rate collateral
2006	1	$	29	$	24	$	20	$	4	17.32	%	3.81	%	8.89	%	3.81	%
2004	1	—		—		—		—		8.51	%	95.58	%	5.82	%	95.58	%
2003	7	41		41		39		2		1.76	%	7.32	%	3.95	%	5.57	%
Total fixed rate prime collateral	9	70		65		59		6		8.18	%	5.94	%	5.99	%	3.81	%
Option ARM collateral
2005	15	148		145		100		45		29.18	%	41.93	%	43.09	%	20.02	%
2004	2	11		11		7		4		27.00	%	28.53	%	29.88	%	27.29	%
Total option ARM prime collateral	17	159		156		107		49		29.03	%	41.01	%	42.18	%	20.02	%
Total prime collateral	26	229		221		166		55		22.68	%	30.34	%	31.17	%	3.81	%
Alt-A(5)
Fixed rate collateral
2005	1	19		19		14		5		14.19	%	7.16	%	6.84	%	7.16	%
2004	1	1		1		1		—		13.94	%	62.14	%	6.85	%	62.14	%
2002	2	5		5		5		—		6.62	%	19.67	%	4.53	%	16.57	%
Total fixed rate Alt-A collateral	4	25		25		20		5		12.53	%	11.97	%	6.34	%	7.16	%
Option ARM collateral
2005	2	34		29		18		11		49.16	%	32.27	%	39.47	%	27.09	%
Total Alt-A collateral	6	59		54		38		16		33.36	%	23.51	%	25.18	%	7.16	%
Total non-agency RMBS	32	$	288	$	275	$	204	$	71	24.87	%	28.94	%	29.94	%	3.81	%
Total fixed rate collateral	13	$	95	$	90	$	79	$	11	9.34	%	7.55	%	6.08	%	3.81	%
Total option ARM collateral	19	193		185		125		60		32.53	%	39.49	%	41.71	%	20.02	%
Total non-agency RMBS	32	$	288	$	275	$	204	$	71	24.87	%	28.94	%	29.94	%	3.81	%

_____________________________

⁽¹⁾  Weighted average percentages are computed based upon unpaid principal balances.

⁽²⁾  Collateral delinquency reflects the percentage of the underlying loan balances that are 60 or more days past due, including loans in foreclosure and real estate owned; as of June 30, 2012, actual cumulative loan losses in the pools of loans underlying the Bank’s non-agency RMBS portfolio ranged from 0 percent to 8.88 percent.

⁽³⁾  Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior classes held by the Bank are impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pools before the securities held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pools, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.

⁽⁴⁾  Minimum credit enhancement reflects the security in each vintage year with the lowest current credit enhancement.

⁽⁵⁾  Reflects the label assigned to the securities by the originator at the time of issuance.

The geographic concentration by state of the loans underlying the Bank’s non-agency RMBS as of December 31, 2011 is provided in the Bank’s 2011 10-K. There were no material changes in these concentrations during the six months ended June 30, 2012.

To assess whether the entire amortized cost bases of its non-agency RMBS are likely to be recovered, the Bank performed a cash flow analysis for each of its non-agency RMBS holdings as of June 30, 2012 under a base case (or best estimate) scenario. The procedures used in this analysis, together with the results thereof, are summarized in “Item 1. Financial Statements” (specifically, Note 4 beginning on page 11 of this report). A summary of the significant inputs that were used in the Bank’s analysis of its entire non-agency RMBS portfolio as of June 30, 2012 is set forth in the table below.

52

SUMMARY OF SIGNIFICANT INPUTS FOR ALL NON-AGENCY RMBS

(dollars in thousands)

	Unpaid Principal Balance at June 30, 2012		Projected Prepayment Rates(2)						Projected Default Rates(2)						Projected Loss Severities(2)
			Weighted Average		Range				Weighted Average		Range				Weighted Average		Range
Year of Securitization					Low		High				Low		High				Low		High
Prime (1)
2004	$	47	19.82	%	19.82	%	19.82	%	7.91	%	7.91	%	7.91	%	25.07	%	25.07	%	25.07	%
2003	40,900		31.33	%	24.74	%	36.18	%	0.84	%	—	%	4.27	%	18.96	%	—	%	59.65	%
Total prime collateral	40,947		31.31	%	19.82	%	36.18	%	0.85	%	—	%	7.91	%	18.97	%	—	%	59.65	%
Alt-A(1)
2006	28,716		8.98	%	8.98	%	8.98	%	41.77	%	41.77	%	41.77	%	47.43	%	47.43	%	47.43	%
2005	200,799		4.62	%	2.96	%	12.17	%	51.41	%	20.42	%	71.44	%	39.71	%	30.13	%	50.04	%
2004	11,863		4.72	%	3.47	%	11.36	%	48.27	%	26.24	%	50.87	%	39.27	%	37.82	%	40.29	%
2002	5,529		15.59	%	15.12	%	15.76	%	5.46	%	2.28	%	13.95	%	24.73	%	20.13	%	37.05	%
Total Alt-A collateral	246,907		5.38	%	2.96	%	15.76	%	49.11	%	2.28	%	71.44	%	40.25	%	20.13	%	50.04	%
Total non-agency RMBS	$	287,854	9.07	%	2.96	%	36.18	%	42.25	%	—	%	71.44	%	37.23	%	—	%	59.65	%

_____________________________

⁽¹⁾  The Bank’s non-agency RMBS holdings are classified as prime or Alt-A in the table above based upon the assumptions that were used to analyze the securities.

⁽²⁾  Prepayment rates reflect the weighted average of projected future voluntary prepayments. Default rates reflect the total balance of loans projected to default as a percentage of the current unpaid principal balance of each of the underlying loan pools. Loss severities reflect the total projected loan losses as a percentage of the total balance of loans that are projected to default.

In addition to evaluating its non-agency RMBS under a best estimate scenario, the Bank also performed a cash flow analysis for each of these securities as of June 30, 2012 under a more stressful housing price scenario. This more stressful scenario was based on a housing price forecast that was 5 percentage points lower at the trough than the base case scenario. Under the more stressful scenario, current-to-trough home price declines were projected to range from 5.0 percent to 11.0 percent over the 3- to 9-month period beginning April 1, 2012. For most of the housing markets, the declines were projected to occur over the 3-month period beginning April 1, 2012. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. Under those recovery paths, which are flatter than those used in the base case scenario, home prices were projected to increase as set forth in the table below.

Months	Range of Annualized Rates
1 - 6	0.0% - 1.9%
7 - 18	0.0% - 2.0%
19 - 24	0.7% - 2.7%
25 - 30	1.3% - 2.7%
31 - 42	1.3% - 3.4%
43 - 66	1.3% - 4.0%
Thereafter	1.5% - 3.8%

As set forth in the table below, under the more stressful housing price scenario, 12 of the Bank’s non-agency RMBS would have been deemed to be other-than-temporarily impaired as of June 30, 2012 (as compared to 2 securities in the Bank’s best estimate scenario as of that date). The stress test scenario and associated results do not represent the Bank’s current expectations and therefore should not be construed as a prediction of the actual performance of these securities. Rather, the results from this hypothetical stress test scenario provide a measure of the credit losses that the Bank might incur if home price declines (and subsequent recoveries) are more adverse than those projected in its OTTI assessment.

53

NON-AGENCY RMBS STRESS-TEST SCENARIO

(dollars in thousands)

	Year of Securitization	Collateral Type	Unpaid Principal Balance		Carrying Value		Fair Value		Credit Losses Recorded in Earnings During the Second Quarter		Hypothetical Credit Losses Under Stress-Test Scenario(2)		Collateral Delinquency(3)		Current Credit Enhancement(4)
Prime (1)
Security #3	2006	Fixed Rate	$	28,716	$	17,869	$	19,788	$	137	$	1,079	17.3	%	3.8	%
Security #4	2005	Option ARM	10,800		6,776		6,893		—		283		21.6	%	41.3	%
Security #6	2005	Option ARM	15,882		9,347		9,915		—		308		20.1	%	20.0	%
Security #7	2004	Option ARM	6,150		4,256		3,853		—		65		19.5	%	27.3	%
Security #8	2005	Option ARM	8,816		6,097		5,610		—		9		28.5	%	40.0	%
Security #10	2005	Option ARM	7,207		4,451		4,153		—		416		41.7	%	37.8	%
Security #11	2005	Option ARM	8,809		5,922		5,688		—		104		50.2	%	45.0	%
Security #12	2004	Option ARM	4,747		3,405		2,918		—		52		36.7	%	30.1	%
Security #15	2005	Option ARM	3,988		3,988		2,793		—		1		21.3	%	49.1	%
Total Prime			95,115		62,111		61,611		137		2,317
Alt-A(1)
Security #1	2005	Option ARM	15,058		8,438		7,878		—		175		47.2	%	27.1	%
Security #5	2005	Option ARM	18,443		12,512		10,465		—		531		50.8	%	36.5	%
Security #14	2005	Fixed Rate	18,928		14,253		14,253		9		278		14.2	%	7.2	%
Total Alt-A			52,429		35,203		32,596		9		984
			$	147,544	$	97,314	$	94,207	$	146	$	3,301

_____________________________

⁽¹⁾  Security #1, Security #5 and Security #14 are the only securities presented in the table above that were labeled as Alt-A by the originator at the time of issuance; however, based upon their current collateral or performance characteristics, all of the securities presented in the table above were analyzed using Alt-A assumptions.

⁽²⁾  Represents the credit losses that would have been recorded in earnings during the quarter ended June 30, 2012 if the more stressful housing price scenario had been used in the Bank’s OTTI assessment as of June 30, 2012.

⁽³⁾  Collateral delinquency reflects the percentage of the underlying loan balances that are 60 or more days past due, including loans in foreclosure and real estate owned; as of June 30, 2012, actual cumulative loan losses in the pools of loans underlying the securities presented in the table ranged from 1.48 percent to 8.88 percent.

⁽⁴⁾  Current credit enhancement percentages reflect the ability of subordinated classes of securities to absorb principal losses and interest shortfalls before the senior classes held by the Bank are impacted (i.e., the losses, expressed as a percentage of the outstanding principal balances, that could be incurred in the underlying loan pools before the securities held by the Bank would be impacted, assuming that all of those losses occurred on the measurement date). Depending upon the timing and amount of losses in the underlying loan pools, it is possible that the senior classes held by the Bank could bear losses in scenarios where the cumulative loan losses do not exceed the current credit enhancement percentage.

While substantially all of the Bank's MBS portfolio is comprised of CMOs with floating rate coupons ($5.5 billion par value at June 30, 2012) that do not expose it to interest rate risk if interest rates rise moderately, such securities include caps that would limit increases in the floating rate coupons if short-term interest rates rise above the caps. In addition, if interest rates rise, prepayments on the mortgage loans underlying the securities would likely decline, thus lengthening the time that the securities would remain outstanding with their coupon rates capped. As of June 30, 2012, one-month LIBOR was 0.25 percent and the effective interest rate caps on one-month LIBOR (the interest cap rate minus the stated spread on the coupon) embedded in the CMO floaters ranged from 6.0 percent to 15.3 percent. The largest concentration of embedded effective caps ($4.7 billion) was between 6.0 percent and 7.0 percent. As of June 30, 2012, one-month LIBOR rates were approximately 575 basis points below the lowest effective interest rate cap embedded in the CMO floaters. To hedge a portion of the potential cap risk embedded in these securities, the Bank held (i) $3.4 billion of interest rate caps with remaining maturities ranging from 19 months to 48 months as of June 30, 2012, and strike rates ranging from 6.00 percent to 7.00 percent and (ii) two forward-starting interest rate caps, each of which has a notional amount of $250 million. The forward-starting caps have terms that commence in October 2012; these forward-starting caps mature in October 2014 and October 2015 and have strike rates of 6.50 percent and 7.00 percent, respectively. If interest rates rise above the strike rates specified in these interest rate cap agreements, the Bank will be entitled to receive interest payments according to the terms and conditions of such agreements. These payments would be based upon the notional amounts of those agreements and the difference between the specified strike rate and either one-month or three-month LIBOR.

54

The following table provides a summary of the notional amounts, strike rates and expiration periods of the Bank’s portfolio of stand-alone CMO-related interest rate cap agreements as of June 30, 2012.

SUMMARY OF CMO-RELATED INTEREST RATE CAP AGREEMENTS

(dollars in millions)

Expiration	Notional Amount		Strike Rate
First quarter 2014	$	500	6.00	%
First quarter 2014	500		6.50	%
Third quarter 2014	700		6.50	%
Fourth quarter 2014	250		6.00	%
Fourth quarter 2014 (1)	250		6.50	%
First quarter 2015	150		6.75	%
Second quarter 2015	250		6.50	%
Third quarter 2015	150		6.75	%
Third quarter 2015	200		6.50	%
Fourth quarter 2015	250		6.00	%
Fourth quarter 2015 (1)	250		7.00	%
Second quarter 2016	200		6.50	%
Second quarter 2016	250		7.00	%
	$	3,900

_____________________________

⁽¹⁾  These caps are effective beginning in October 2012.

Consolidated Obligations and Deposits

During the six months ended June 30, 2012, the Bank’s outstanding consolidated obligation bonds (at par value) increased by $1.9 billion while its outstanding consolidated obligation discount notes decreased by $0.3 billion. The following table presents the composition of the Bank’s outstanding bonds at June 30, 2012 and December 31, 2011.

COMPOSITION OF CONSOLIDATED OBLIGATION BONDS OUTSTANDING

(par value, dollars in millions)

	June 30, 2012				December 31, 2011
	Balance		Percentage of Total		Balance		Percentage of Total
Fixed rate
Non-callable	$	17,071	78.1	%	$	12,312	61.8	%
Callable	615		2.8		3,956		19.9
Callable step-up	2,572		11.8		2,554		12.8
Single-index variable rate	1,500		6.8		895		4.5
Fixed that converts to variable	62		0.3		211		1.0
Callable step-down	50		0.2		—		—
Total par value	$	21,870	100.0	%	$	19,928	100.0	%

Due to its limited lending activity, the Bank’s funding needs remained relatively low during the first six months of 2012, with only $12.9 billion of consolidated obligation bonds issued during this period. The proceeds of these issuances were generally used to replace maturing or called consolidated obligations.

The average LIBOR cost of consolidated obligation bonds issued during the first six months of 2012 was slightly higher than the average LIBOR cost of consolidated obligation bonds issued during 2011. The weighted average cost of swapped and

55

variable-rate consolidated obligation bonds issued by the Bank increased from approximately LIBOR minus 30 basis points during the year ended December 31, 2011 to approximately LIBOR minus 27 basis points in the first quarter of 2012 and to approximately LIBOR minus 23 basis points in the second quarter of 2012. The slightly higher cost of consolidated obligation bonds issued during the six months ended June 30, 2012, as compared to those issued during the year ended December 31, 2011, was primarily due to the Bank's increased use of non-callable debt, which generally has a higher cost relative to LIBOR than callable debt, during 2012.

Demand and term deposits were $1.1 billion and $1.5 billion at June 30, 2012 and December 31, 2011, respectively. The size of the Bank’s deposit base varies as market factors change, including the attractiveness of the Bank’s deposit pricing relative to the rates available to members on alternative money market investments, members’ investment preferences with respect to the maturity of their investments, and member liquidity.

Capital

The Bank’s outstanding capital stock (excluding mandatorily redeemable capital stock) was approximately $1.2 billion and $1.3 billion at June 30, 2012 and December 31, 2011, respectively. The Bank’s average outstanding capital stock (excluding mandatorily redeemable capital stock) decreased from $1.3 billion for the year ended December 31, 2011 to $1.2 billion for the six months ended June 30, 2012. The decrease in outstanding capital stock from December 31, 2011 to June 30, 2012 was attributable primarily to the change in the membership investment requirement discussed below.

Mandatorily redeemable capital stock outstanding at June 30, 2012 and December 31, 2011 was $4.9 million and $15.0 million, respectively. Although mandatorily redeemable capital stock is excluded from capital (equity) for financial reporting purposes, it is considered capital for regulatory purposes.

At June 30, 2012 and December 31, 2011, the Bank’s five largest shareholders collectively held $266 million and $253 million, respectively, of capital stock, which represented 22.0 percent and 20.0 percent, respectively, of the Bank’s total outstanding capital stock (including mandatorily redeemable capital stock) as of those dates. The following table presents the Bank’s five largest shareholders as of June 30, 2012.

FIVE LARGEST SHAREHOLDERS AS OF JUNE 30, 2012

(par value, dollars in thousands)

Name	Par Value of Capital Stock		Percent of Total Par Value of Capital Stock
Comerica Bank	$	89,086	7.4	%
Texas Capital Bank, N.A.	56,606		4.7
Prosperity Bank	44,236		3.6
Beal Bank USA	38,200		3.2
ViewPoint Bank, N.A.	37,535		3.1
	$	265,663	22.0	%

As of June 30, 2012, all of the stock held by the five institutions shown in the table above was classified as capital in the statement of condition.

Members are required to maintain an investment in Class B stock equal to the sum of a membership investment requirement and an activity-based investment requirement. Effective April 20, 2012, the membership investment requirement was reduced from 0.05 percent of each member’s total assets as of the previous calendar year-end, subject to a minimum of $1,000 and a maximum of $10,000,000, to 0.04 percent of each member’s total assets as of the previous calendar year-end, subject to a minimum of $1,000 and a maximum of $7,000,000. The activity-based investment requirement remained unchanged at 4.10 percent of outstanding advances.

Periodically, the Bank repurchases a portion of members’ excess capital stock. Excess stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum investment requirement. The portion of members’ excess capital stock subject to repurchase is known as surplus stock. The Bank generally repurchases surplus stock on the last business day of the month following the end of each calendar quarter. For the quarterly repurchases that occurred on January 31, 2012, April 30, 2012 and July 31, 2012, surplus stock was defined as the amount of stock held by a member in excess of 105 percent, 102.5 percent and 102.5 percent, respectively, of the member’s minimum investment requirement. Through January 31, 2012, the Bank’s practice was that a member’s surplus stock was not repurchased if the amount of that member’s surplus stock was $250,000 or less or if, subject to certain exceptions, the member was on restricted collateral status. For the repurchases that occurred on April 30, 2012 and July 31, 2012, a member's surplus stock was not repurchased if the

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amount of that member’s surplus stock was $100,000 or less or if, subject to certain exceptions, the member was on restricted collateral status. From time to time, the Bank may further modify the definition of surplus stock or the timing and/or frequency of surplus stock repurchases.

The following table sets forth the repurchases of surplus stock that have occurred since December 31, 2011.

SURPLUS STOCK REPURCHASED UNDER QUARTERLY REPURCHASE PROGRAM

(dollars in thousands)

Date of Repurchase by the Bank	Shares Repurchased	Amount of Repurchase		Amount Classified as Mandatorily Redeemable Capital Stock at Date of Repurchase
January 31, 2012	1,073,567	$	107,357	$	—
April 30, 2012	1,899,070	189,907		197
July 31, 2012	1,391,780	139,178		—

At June 30, 2012, the Bank’s excess stock totaled $203.1 million, which represented 0.6% percent of the Bank’s total assets as of that date.

The following table presents outstanding capital stock, by type of institution, as of June 30, 2012 and December 31, 2011.

CAPITAL STOCK OUTSTANDING BY INSTITUTION TYPE

(dollars in millions)

	June 30, 2012				December 31, 2011
	Par Value of Capital Stock		Percent of Total Par Value of Capital Stock		Par Value of Capital Stock		Percent of Total Par Value of Capital Stock
Commercial banks	$	891	74	%	$	894	70	%
Thrifts	147		12		193		15
Credit unions	118		10		111		9
Insurance companies	48		4		58		5
Total capital stock classified as capital	1,204		100		1,256		99
Mandatorily redeemable capital stock	5		—		15		1
Total regulatory capital stock	$	1,209	100	%	$	1,271	100	%

During the six months ended June 30, 2012, the Bank’s retained earnings increased by $44.4 million, from $494.7 million to $539.1 million. During this same period, the Bank paid dividends on capital stock totaling $2.3 million, which represented an annualized dividend rate of 0.375 percent. The Bank’s first and second quarter 2012 dividend rates exceeded the upper end of the Federal Reserve’s target for the federal funds rate for the quarters ended December 31, 2011 and March 31, 2012, respectively, by 12.5 basis points. The first quarter dividend, applied to average capital stock held during the period from October 1, 2011 through December 31, 2011, was paid on March 30, 2012. The second quarter dividend, applied to average capital stock held during the period from January 1, 2012 through March 31, 2012, was paid on June 29, 2012.

The Bank has had a long-standing practice of benchmarking the dividend rate that it pays on capital stock to the average federal funds rate. Consistent with that practice, the Bank manages its balance sheet so that its returns (attributable to adjusted earnings) generally track short-term interest rates.

While there can be no assurances, taking into consideration its current earnings expectations and anticipated market conditions, the Bank currently expects to pay dividends for the remainder of 2012 at or slightly above the upper end of the Federal Reserve’s target range for the federal funds rate for the applicable dividend period (i.e., for each calendar quarter during this period, the upper end of the Federal Reserve's target for the federal funds rate for the preceding quarter). Consistent with its long-standing practice, the Bank expects to pay these dividends in the form of capital stock with any fractional shares paid in cash.

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The Bank is required to maintain at all times permanent capital (defined under the Finance Agency’s rules as retained earnings and amounts paid in for Class B stock, regardless of its classification as equity or liabilities for financial reporting purposes) in an amount at least equal to its risk-based capital requirement, which is the sum of its credit risk capital requirement, its market risk capital requirement, and its operations risk capital requirement, as further described in the Bank’s 2011 10-K. At June 30, 2012, the Bank’s total risk-based capital requirement was $400 million, comprised of credit risk, market risk and operations risk capital requirements of $245 million, $63 million and $92 million, respectively, and its permanent capital was $1.7 billion.

In addition to the risk-based capital requirement, the Bank is subject to two other capital requirements. First, the Bank must, at all times, maintain a minimum total capital-to-assets ratio of 4.0 percent. For this purpose, total capital is defined by Finance Agency rules and regulations as the Bank’s permanent capital and the amount of any general allowance for losses (i.e., those reserves that are not held against specific assets). Second, the Bank is required to maintain at all times a minimum leverage capital-to-assets ratio in an amount at least equal to 5.0 percent of its total assets. In applying this requirement to the Bank, leverage capital includes the Bank’s permanent capital multiplied by a factor of 1.5 plus the amount of any general allowance for losses. The Bank did not have any general reserves at June 30, 2012 or December 31, 2011. Under the regulatory definitions, total capital and permanent capital exclude accumulated other comprehensive income (loss). At all times during the six months ended June 30, 2012, the Bank was in compliance with all of its regulatory capital requirements. At June 30, 2012, the Bank's total capital-to-assets and leverage capital-to-assets ratios were 5.03% and 7.55%, respectively. For a summary of the Bank’s compliance with the Finance Agency’s capital requirements as of June 30, 2012 and December 31, 2011, see “Item 1. Financial Statements” (specifically, Note 10 on page 29 of this report).

The Bank’s Risk Management Policy contains a minimum total regulatory capital-to-assets ratio of 4.1 percent, which is higher than the 4.0 percent ratio required under the Finance Agency’s capital rules. At all times during the six months ended June 30, 2012, the Bank was in compliance with its minimum capital-to-assets ratio.

Derivatives and Hedging Activities

The Bank enters into interest rate swap, swaption, cap and forward rate agreements (collectively, interest rate exchange agreements) with highly rated financial institutions to manage its exposure to changes in interest rates and/or to adjust the effective maturity, repricing index and/or frequency or option characteristics of financial instruments. This use of derivatives is integral to the Bank’s financial management strategy, and the impact of these interest rate exchange agreements permeates the Bank’s financial statements. For additional discussion, see “Item 1. Financial Statements” (specifically, Note 9 beginning on page 23 of this report). The following table provides the notional balances of the Bank’s derivative instruments, by balance sheet category and accounting designation, as of June 30, 2012 and December 31, 2011.

COMPOSITION OF DERIVATIVES BY BALANCE SHEET CATEGORY AND ACCOUNTING DESIGNATION

(in millions of dollars)

	Short-Cut Method		Long-Haul Method		Economic Hedges		Total
June 30, 2012
Advances	$	5,520	$	1,601	$	160	$	7,281
Investments	—		4,918		3,900		8,818
Consolidated obligation bonds	—		18,111		650		18,761
Balance sheet	—		—		4,700		4,700
Intermediary positions	—		—		163		163
Total notional balance	$	5,520	$	24,630	$	9,573	$	39,723
December 31, 2011
Advances	$	5,897	$	1,617	$	220	$	7,734
Investments	—		4,184		3,900		8,084
Consolidated obligation bonds	—		16,395		750		17,145
Consolidated obligation discount notes	—		—		5,047		5,047
Balance sheet	—		—		4,700		4,700
Intermediary positions	—		—		123		123
Total notional balance	$	5,897	$	22,196	$	14,740	$	42,833

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The following table presents the earnings impact of derivatives and hedging activities, and the changes in fair value of any hedged items recorded at fair value during the three and six months ended June 30, 2012 and 2011.

NET EARNINGS IMPACT OF DERIVATIVES AND HEDGING ACTIVITIES

(dollars in millions)

	Advances			Investments			Consolidated Obligation Bonds			Consolidated Obligation Discount Notes		Optional Advance Commitments			Balance Sheet			Total
Three Months Ended June 30, 2012
Amortization/accretion of hedging activities in net interest income (1)	$	—		$	26		$	(1	)	$	—	$	—		$	—		$	25
Net interest settlements included in net interest income (2)	(44		)	(44		)	45			—		—			—			(43		)
Net gain (loss) on derivatives and hedging activities
Net losses on fair value hedges	(1		)	(1		)	—			—		—			—			(2		)
Net gains (losses) on economic hedges	—			(2		)	—			—		(1		)	2			(1		)
Net interest settlements on economic hedges	—			—			—			1		—			2			3
Total net gain (loss) on derivatives and hedging activities	(1		)	(3		)	—			1		(1		)	4			—
Net impact of derivatives and hedging activities	(45		)	(21		)	44			1		(1		)	4			(18		)
Net gain on hedged financial instruments carried at fair value	—			—			—			—		1			—			1
	$	(45	)	$	(21	)	$	44		$	1	$	—		$	4		$	(17	)
Three Months Ended June 30, 2011
Amortization/accretion of hedging activities in net interest income (1)	$	1		$	—		$	(7	)	$	—	$	—		$	—		$	(6	)
Net interest settlements included in net interest income (2)	(56		)	—			78			—		—			—			22
Net gain (loss) on derivatives and hedging activities
Net losses on fair value hedges	—			—			(1		)	—		—			—			(1		)
Net losses on economic hedges	—			(7		)	—			—		(5		)	(2		)	(14		)
Net interest settlements on economic hedges	—			—			—			—		—			1			1
Total net loss on derivatives and hedging activities	—			(7		)	(1		)	—		(5		)	(1		)	(14		)
Net impact of derivatives and hedging activities	(55		)	(7		)	70			—		(5		)	(1		)	2
Net gain on hedged financial instruments carried at fair value	—			—			—			—		5			—			5
	$	(55	)	$	(7	)	$	70		$	—	$	—		$	(1	)	$	7

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Six Months Ended June 30, 2012
Amortization/accretion of hedging activities in net interest income (1)	$	(1	)	$	51		$	(1	)		$	—		$	—		$	—		$	49
Net interest settlements included in net interest income (2)	(91		)	(85		)	90				—			—			—			(86		)
Net gain (loss) on derivatives and hedging activities
Net losses on fair value hedges	(1		)	—			(1		)		—			—			—			(2		)
Net gains (losses) on economic hedges	—			(3		)	2				1			(2		)	1			(1		)
Net interest settlements on economic hedges	—			—			—				1			—			5			6
Total net gain (loss) on derivatives and hedging activities	(1		)	(3		)	1				2			(2		)	6			3
Net impact of derivatives and hedging activities	(93		)	(37		)	90				2			(2		)	6			(34		)
Net gain on hedged financial instruments carried at fair value	—			—			—				—			2			—			2
	$	(93	)	$	(37	)	$	90			$	2		$	—		$	6		$	(32	)
Six Months Ended June 30, 2011
Amortization/accretion of hedging activities in net interest income (1)	$	2		$	—		$	(15	)		$	—		$	—		$	—		$	(13	)
Net interest settlements included in net interest income (2)	(115		)	—			156				—			—			—			41
Net gain (loss) on derivatives and hedging activities
Net losses on fair value hedges	—			—			(1		)		—			—			—			(1		)
Net losses on economic hedges	—			(11		)	(1		)		(1		)	(4		)	(6		)	(23		)
Net interest settlements on economic hedges	—			—			1			—	1			—			1			3
Total net loss on derivatives and hedging activities	—			(11		)	(1		)		—			(4		)	(5		)	(21		)
Net impact of derivatives and hedging activities	(113		)	(11		)	140				—			(4		)	(5		)	7
Net gain on hedged financial instruments carried at fair value	—			—			—				—			4			—			4
	$	(113	)	$	(11	)	$	140			$	—		$	—		$	(5	)	$	11

_____________________________

⁽¹⁾  Represents the amortization/accretion of hedging fair value adjustments for both open and closed hedge positions.

⁽²⁾  Represents interest income/expense on derivatives included in net interest income.

By entering into interest rate exchange agreements with highly rated financial institutions (with which it has in place master agreements), the Bank generally exchanges a defined market risk for the risk that the counterparty will not be able to fulfill its obligations in the future. The Bank manages this credit risk by spreading its transactions among as many highly rated counterparties as is practicable, by entering into master agreements with each of its counterparties that include maximum unsecured credit exposure thresholds ranging from $100,000 to $500,000, and by monitoring its exposure to each counterparty on a daily basis. In addition, all of the Bank’s master agreements include netting arrangements whereby the fair values of all interest rate derivatives (including accrued interest receivables and payables) with each counterparty are offset for purposes of measuring credit exposure. The master agreements require the delivery of collateral consisting of cash or very liquid, highly rated securities (generally consisting of U.S. government-guaranteed or agency debt securities) if credit risk exposures rise above the thresholds.

The notional amount of interest rate exchange agreements does not reflect the Bank’s credit risk exposure, which is much less than the notional amount. The maximum credit risk exposure is the estimated cost, on a present value basis, of replacing at current market rates all interest rate exchange agreements with a counterparty with which the Bank is in a net gain position, if the counterparty were to default. Maximum credit risk exposure also considers the existence of any cash collateral held or remitted by the Bank. As discussed above, the Bank’s master agreements with its counterparties contain unsecured credit exposure thresholds that must be met before collateral is required to be delivered by one party to the other party. Once the counterparties agree to the valuations of the interest rate exchange agreements, and if it is determined that the unsecured credit exposure exceeds the threshold, then, upon a request made by the unsecured counterparty, the party that has the unsecured obligation to the counterparty bearing the risk of the unsecured credit exposure generally must deliver sufficient collateral to reduce the unsecured credit exposure to zero. Collateral is delivered daily when these thresholds are met.

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As of June 30, 2012 and December 31, 2011, cash collateral totaling $1.091 billion and $563 million, respectively, and available-for-sale securities with a total fair value of $183 million and $512 million, respectively, had been delivered by the Bank to its derivative counterparties under the terms of the master agreements. At June 30, 2012, the Bank held as collateral securities with a total fair value of $1.4 million and cash balances of $1.7 million from its derivative counterparties under the terms of the master agreements. At December 31, 2011, the Bank held as collateral cash balances of $0.7 million from its derivative counterparties under the terms of the master agreements. The Bank did not hold any securities as collateral from its derivative counterparties at December 31, 2011.

The following table provides information regarding the Bank’s derivative counterparty credit exposure as of June 30, 2012 and December 31, 2011.

DERIVATIVES COUNTERPARTY CREDIT EXPOSURE

(dollars in millions)

Credit Rating(1)	Number of Counterparties	Notional Principal(2)		Maximum Credit Exposure (3)		Cash Collateral Due(4)		Net Credit Exposure
June 30, 2012
Aa(5)	3	$	4,511.5	$	0.4	$	—	$	0.4
A(6)	9	23,858.4		5.7		5.3		0.4
Baa (6)	2	11,271.8		8.0		8.0		—
	14	39,641.7		$	14.1	$	13.3	$	0.8
Member institutions (7)	10	81.4
Total	24	$	39,723.1
December 31, 2011
Aaa	1	$	220.0	$	2.1	$	2.1	$	—
Aa(5)	7	18,312.6		0.3		—		0.3
A(6)	5	24,239.5		—		—		—
	13	42,772.1		$	2.4	$	2.1	$	0.3
Member institutions (7)	9	61.4
Total	22	$	42,833.5

_____________________________

⁽¹⁾  Credit ratings shown in the table are obtained from Moody’s and are as of June 30, 2012 and December 31, 2011, respectively.

⁽²⁾  Includes amounts that had not settled as of June 30, 2012 and December 31, 2011.

⁽³⁾  Maximum credit risk exposure is presented net of the value of any collateral held and considers any cash collateral remitted by the Bank. The Bank has additional exposure to the extent that the fair values of securities pledged as collateral exceed the outstanding exposures to the secured counterparties. At June 30, 2012, the Bank had pledged available-for-sale securities with an aggregate fair value of $182.9 million to secure an aggregate outstanding exposure of $178.1 million that two of its derivative counterparties had to the Bank. At December 31, 2011, the Bank had pledged available-for-sale securities with an aggregate fair value of $512.5 million to secure an aggregate outstanding exposure of $517.3 million that three of its derivative counterparties had to the Bank.

⁽⁴⁾  Amount of collateral to which the Bank had contractual rights under counterparty credit agreements based on June 30, 2012 and December 31, 2011 credit exposures. Excess cash collateral totaling $13.4 million and $2.1 million was returned to the Bank under these agreements in early July 2012 and early January 2012, respectively.

⁽⁵⁾  The figures for Aa-rated counterparties as of June 30, 2012 and December 31, 2011 include transactions with a counterparty that is affiliated with a member institution. Transactions with this counterparty had an aggregate notional principal of $1.8 billion and $1.5 billion as of June 30, 2012 and December 31, 2011, respectively. These transactions represented a maximum credit exposure of $0.4 million to the Bank as of June 30, 2012 and did not represent a credit exposure to the Bank at December 31, 2011.

⁽⁶⁾  The figures for Baa-rated counterparties as of June 30, 2012 and A-rated counterparties as of December 31, 2011 include transactions with one counterparty that is affiliated with a non-member shareholder of the Bank. Transactions with that counterparty had an aggregate notional principal of $9.4 billion and $7.7 billion as of June 30, 2012 and December 31, 2011, respectively. These transactions represented a maximum credit exposure of $5.5 million to the Bank as of June 30, 2012 and did not represent a credit exposure to the Bank at December 31, 2011. In addition, the figures for A-rated counterparties as of June 30, 2012 include transactions with another counterparty that is also affiliated with the same non-member shareholder of the Bank. Transactions with that counterparty had an aggregate notional principal of $0.3 billion as of June 30, 2012 and did not represent a credit exposure to the Bank at that date.

⁽⁷⁾  This product offering and the collateral provisions associated therewith are discussed in the paragraph below.

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The Bank offers interest rate swaps, caps and floors to its members to assist them in meeting their risk management objectives. In derivative transactions with its members, the Bank acts as an intermediary by entering into an interest rate exchange agreement with the member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s derivative counterparties discussed above. When entering into interest rate exchange agreements with its members, the Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. Eligible collateral for derivative transactions consists of collateral that is eligible to secure advances and other obligations under the member’s Advances and Security Agreement with the Bank.

On July 21, 2010, the President of the United States signed into law the Dodd-Frank Act, which provides for new statutory and regulatory requirements for derivative transactions, including those used by the Bank to hedge its interest rate risk. As a result of these requirements, certain derivative transactions will be required to be cleared through a third-party central clearinghouse and traded on regulated exchanges or new swap execution facilities. Cleared trades are expected to be subject to initial and variation margin requirements established by the clearinghouse and its clearing members. While clearing derivatives through a central clearinghouse may or may not reduce the counterparty credit risk typically associated with bilateral transactions, certain requirements, including margin provisions, for cleared trades have the potential to make derivative transactions more costly for the Bank. The Dodd-Frank Act will also change the regulatory framework for derivative transactions that are not subject to mandatory clearing requirements (uncleared trades). While the Bank expects to be able to continue to enter into uncleared trades on a bilateral basis, those transactions are expected to be subject to new regulatory requirements, including minimum margin and capital requirements imposed by regulators on one or both counterparties to the transactions. Any changes to the margin or capital requirements associated with uncleared trades could adversely affect the pricing of certain uncleared derivative transactions entered into by the Bank, thereby increasing the costs of managing the Bank’s interest rate risk.

Because the Dodd-Frank Act calls for a number of regulations, orders, determinations and reports to be issued, the impact of this legislation on the Bank’s hedging activities and the costs associated with those activities will become known only after the required regulations, orders, determinations, and reports are issued and implemented. For further information regarding the Dodd-Frank Act, see the Bank’s 2011 10-K (specifically, “Business — Legislative and Regulatory Developments” beginning on page 17 of that report) and the update included in this report on pages 43-44.

Market Value of Equity

The ratio of the Bank’s estimated market value of equity to its book value of equity was approximately 111 percent and 110 percent at June 30, 2012 and December 31, 2011, respectively. For additional discussion, see “Part I / Item 3 — Quantitative and Qualitative Disclosures About Market Risk — Interest Rate Risk.”

Results of Operations

Net Income

Net income for the three months ended June 30, 2012 and 2011 was $22.5 million and $6.7 million, respectively. The Bank’s net income for the three months ended June 30, 2012 represented an annualized return on average capital stock (“ROCS”) of 7.66 percent, which was 751 basis points above the average effective federal funds rate for the quarter. In comparison, the Bank’s ROCS was 2.02 percent for the three months ended June 30, 2011, which exceeded the average effective federal funds rate for that quarter by 193 basis points. Net income for the six months ended June 30, 2012 and 2011 was $46.8 million and $18.2 million, respectively. The Bank’s net income for the six months ended June 30, 2012 represented an ROCS of 7.81 percent, which was 768 basis points above the average effective federal funds rate for the period. In comparison, the Bank’s ROCS was 2.59 percent for the six months ended June 30, 2011, which was 247 basis points above the average effective federal funds rate for that period. To derive the Bank’s ROCS, net income is divided by average capital stock outstanding excluding stock that is classified as mandatorily redeemable capital stock. The factors contributing to the changes in ROCS compared to the average effective federal funds rate are discussed below.

Income Before Assessments

During the three months ended June 30, 2012 and 2011, the Bank’s income before assessments was $25.0 million and $9.1 million, respectively. As discussed in more detail below, the $15.9 million increase in income before assessments from period to period was attributable to a $3.2 million increase in net interest income, an $11.8 million improvement in other income/loss and a $1.0 million decrease in other expense. The improvement in other income/loss was due primarily to a $14.0 million decrease in net losses on derivatives and hedging activities and a $2.2 million decrease in credit charges on the Bank's non-agency RMBS holdings, offset by a $3.8 million decrease in the unrealized gains on optional advance commitments carried at fair value.

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The Bank’s income before assessments was $52.0 million and $24.8 million for the six months ended June 30, 2012 and 2011, respectively. As discussed in more detail below, this $27.2 million increase in income before assessments from period to period was attributable to a $1.7 million increase in net interest income, a $23.5 million improvement in other income/loss and a $2.0 million decrease in other expense. The improvement in other income/loss was due primarily to a $23.1 million improvement in net gains/losses on derivatives and hedging activities and a $3.4 million decrease in credit charges on the Bank's non-agency RMBS holdings, offset by a $1.8 million decrease in the unrealized gains on optional advance commitments carried at fair value.

The components of income before assessments (net interest income, other income/loss and other expense) are discussed in more detail in the following sections.

Net Interest Income

For the three months ended June 30, 2012 and 2011, the Bank’s net interest income was $40.6 million and $37.4 million, respectively. The Bank’s net interest income was $81.2 million and $79.5 million for the six months ended June 30, 2012 and 2011, respectively. As described further below, the Bank’s net interest income does not include net interest settlements on economic hedge derivatives, which also contributed to the Bank’s overall income before assessments during the three and six months ended June 30, 2012 and 2011. If these net interest settlements had been included, net interest income would have increased by $4.6 million and $4.4 million for the three and six months ended June 30, 2012, as compared to the corresponding periods in 2011. The increases in net interest income were due in large part to increases in the average balances of earning assets from $32.0 billion and $34.1 billion for the three and six months ended June 30, 2011 to $35.6 billion and $35.2 billion for the corresponding periods in 2012.

For the three months ended June 30, 2012 and 2011, the Bank’s net interest margin was 46 basis points and 47 basis points, respectively. The Bank’s net interest margin was 47 basis points for both the six months ended June 30, 2012 and 2011. Net interest margin, or net interest income as a percent of average earning assets, is a function of net interest spread and the rates of return on assets funded by the investment of the Bank’s capital. Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. The Bank’s net interest spread decreased from 44 basis points for the three months ended June 30, 2011 to 42 basis points for the three months ended June 30, 2012. The Bank’s net interest spread decreased from 43 basis points for the six months ended June 30, 2011 to 42 basis points for the six months ended June 30, 2012. The contribution of earnings from the Bank’s invested capital to the net interest margin (the impact of non-interest bearing funds) increased from 3 basis points for the three months ended June 30, 2011 to 4 basis points for the three months ended June 30, 2012. The contribution of earnings from the Bank’s invested capital to the net interest margin increased from 4 basis points for the six months ended June 30, 2011 to 5 basis points for the six months ended June 30, 2012.

As noted above, the Bank’s net interest income excludes net interest settlements on economic hedge derivatives. During the six months ended June 30, 2012, the Bank used approximately $4.7 billion(average notional balance) of interest rate basis swaps to hedge the risk of changes in spreads between one-month and three-month LIBOR, approximately $1.9 billion (average notional balance) of fixed-for-floating interest rate swaps to hedge some of its longer-term discount notes and approximately $0.7 billion (average notional balance) of interest rate swaps to convert variable-rate consolidated obligations from the daily federal funds rate to three-month LIBOR (“federal funds floater swaps”). During the comparable period in 2011, the Bank used approximately $5.8 billion (average notional balance) of interest rate basis swaps to hedge the risk of changes in spreads between one-month and three-month LIBOR, approximately $0.2 billion (average notional balance) of fixed-for-floating interest rate swaps to hedge some of its longer-term discount notes and approximately $1.4 billion (average notional balance) of federal funds floater swaps to convert variable-rate consolidated obligations from the daily federal funds rate to three-month LIBOR. These swaps are accounted for as economic hedges. Net interest income associated with economic hedge derivatives is recorded in other income (loss) in the statements of income and therefore excluded from net interest income, net interest margin and net interest spread. Net interest income on the Bank’s economic hedge derivatives totaled $2.9 million and $5.9 million for the three and six months ended June 30, 2012, respectively, compared to $1.4 million and $3.1 million, respectively, for the corresponding periods in 2011.

The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for the three months ended June 30, 2012 and 2011.

63

YIELD AND SPREAD ANALYSIS

(dollars in millions)

	For the Three Months Ended June 30,
	2012							2011
	Average Balance			Interest Income/ Expense(c)		Average Rate(a)(c)		Average Balance			Interest Income/ Expense(c)		Average Rate(a)(c)
Assets
Interest-bearing deposits (b)	$	848		$	—	0.16	%	$	209		$	—	0.10	%
Securities purchased under agreements to resell	2,340			1		0.16	%	590			—		0.10	%
Federal funds sold	1,928			1		0.14	%	2,455			1		0.07	%
Investments
Trading	7			—		—	%	6			—		—	%
Available-for-sale (d)	5,567			8		0.57	%	—			—		—	%
Held-to-maturity (d)	5,790			18		1.24	%	7,664			21		1.08	%
Advances (e)	18,959			49		1.03	%	20,863			57		1.10	%
Mortgage loans held for portfolio	147			2		5.51	%	189			2		5.56	%
Total earning assets	35,586			79		0.88	%	31,976			81		1.02	%
Cash and due from banks	158							44
Other assets	118							125
Derivatives netting adjustment (b)	(848		)					(241		)
Fair value adjustment on available-for-sale securities (d)	13							—
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities (d)	(48		)					(56		)
Total assets	$	34,979		79		0.90	%	$	31,848		81		1.02	%
Liabilities and Capital
Interest-bearing deposits (b)	$	1,171		—		0.03	%	$	1,339		—		0.02	%
Consolidated obligations
Bonds	21,726			36		0.66	%	27,789			43		0.63	%
Discount notes	9,917			3		0.10	%	809			—		0.04	%
Mandatorily redeemable capital stock and other borrowings	9			—		0.30	%	19			—		0.38	%
Total interest-bearing liabilities	32,823			39		0.46	%	29,956			43		0.58	%
Other liabilities	1,321							389
Derivatives netting adjustment (b)	(848		)					(241		)
Total liabilities	33,296			39		0.46	%	30,104			43		0.58	%
Total capital	1,683							1,744
Total liabilities and capital	$	34,979				0.44	%	$	31,848				0.55	%
Net interest income				$	40						$	38
Net interest margin						0.46	%						0.47	%
Net interest spread						0.42	%						0.44	%
Impact of non-interest bearing funds						0.04	%						0.03	%

_____________________________

^(a)  Percentages are annualized figures. Amounts used to calculate average rates are based on whole dollars. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.

64

^(b)  The Bank offsets the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. The average balances of interest-bearing deposit assets for the three months ended June 30, 2012 and 2011 in the table above include $847 million and $209 million, respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, the average balances of the interest-bearing deposit liabilities for the three months ended June 30, 2012 and 2011 in the table above include $1 million and $33 million, respectively, which are classified as derivative assets/liabilities on the statements of condition.

^(c)  Interest income/expense and average rates include the effects of associated interest rate exchange agreements to the extent such agreements qualify for fair value hedge accounting. If the agreements do not qualify for hedge accounting or were not designated in a hedging relationship for accounting purposes, the net interest income/expense associated with such agreements is recorded in other income (loss) in the statements of income and therefore excluded from the Yield and Spread Analysis. Net interest income on economic hedge derivatives totaled $2.9 million and $1.4 million for the three months ended June 30, 2012 and 2011, respectively, the components of which are presented below in the sub-section entitled “Other Income (Loss).”

^(d)  Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.

^(e)  Interest income and average rates include prepayment fees on advances.

65

The following table presents average balance sheet amounts together with the total dollar amounts of interest income and expense and the weighted average interest rates of major earning asset categories and the funding sources for those earning assets for the six months ended June 30, 2012 and 2011.

YIELD AND SPREAD ANALYSIS

(dollars in millions)

	For the Six Months Ended June 30,
	2012							2011
	Average Balance			Interest Income/ Expense(c)		Average Rate(a)(c)		Average Balance			Interest Income/ Expense(c)		Average Rate(a)(c)
Assets
Interest-bearing deposits (b)	$	717		$	—	0.14	%	$	198		$	—	0.13	%
Securities purchased under agreements to resell	2,136			2		0.14	%	457			—		0.11	%
Federal funds sold	1,889			1		0.12	%	3,011			2		0.11	%
Investments
Trading	7			—		—	%	6			—		—	%
Available-for-sale (d)	5,397			16		0.58	%	—			—		—	%
Held-to-maturity (d)	6,031			36		1.19	%	7,957			45		1.13	%
Advances (e)	18,840			101		1.07	%	22,318			118		1.06	%
Mortgage loans held for portfolio	152			4		5.54	%	195			5		5.55	%
Total earning assets	35,169			160		0.91	%	34,142			170		1.00	%
Cash and due from banks	130							60
Other assets	118							143
Derivatives netting adjustment (b)	(718		)					(242		)
Fair value adjustment on available-for-sale securities (d)	5							—
Adjustment for net non-credit portion of other-than-temporary impairments on held-to-maturity securities (d)	(49		)					(59		)
Total assets	$	34,655		160		0.92	%	$	34,044		170		1.00	%
Liabilities and Capital
Interest-bearing deposits (b)	$	1,213		—		0.02	%	$	1,307		—		0.03	%
Consolidated obligations
Bonds	21,306			75		0.70	%	28,700			89		0.62	%
Discount notes	9,852			4		0.08	%	2,046			1		0.13	%
Mandatorily redeemable capital stock and other borrowings	8			—		0.32	%	18			—		0.40	%
Total interest-bearing liabilities	32,379			79		0.49	%	32,071			90		0.57	%
Other liabilities	1,310							388
Derivatives netting adjustment (b)	(718		)					(242		)
Total liabilities	32,971			79		0.48	%	32,217			90		0.56	%
Total capital	1,684							1,827
Total liabilities and capital	$	34,655				0.45	%	$	34,044				0.53	%
Net interest income				$	81						$	80
Net interest margin						0.47	%						0.47	%
Net interest spread						0.42	%						0.43	%
Impact of non-interest bearing funds						0.05	%						0.04	%

_____________________________

66

^(a)  Percentages are annualized figures. Amounts used to calculate average rates are based on whole dollars. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.

^(b)  The Bank offsets the fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against the fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. The average balances of interest-bearing deposit assets for the six months ended June 30, 2012 and 2011 in the table above include $717 million and $198 million, respectively, which are classified as derivative assets/liabilities on the statements of condition. In addition, the average balances of the interest-bearing deposit liabilities for the six months ended June 30, 2012 and 2011 in the table above include $1 million and $44 million, respectively, which are classified as derivative assets/liabilities on the statements of condition.

^(c)  Interest income/expense and average rates include the effects of associated interest rate exchange agreements to the extent such agreements qualify for fair value hedge accounting. If the agreements do not qualify for hedge accounting or were not designated in a hedging relationship for accounting purposes, the net interest income/expense associated with such agreements is recorded in other income (loss) in the statements of income and therefore excluded from the Yield and Spread Analysis. Net interest income on economic hedge derivatives totaled $5.9 million and $3.1 million for the six months ended June 30, 2012 and 2011, respectively, the components of which are presented below in the sub-section entitled “Other Income (Loss).”

^(d)  Average balances for available-for-sale and held-to-maturity securities are calculated based upon amortized cost.

^(e)  Interest income and average rates include prepayment fees on advances.

Changes in both volume (i.e., average balances) and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between the three-month and six-month periods in 2012 and 2011 and excludes net interest income on economic hedge derivatives, as discussed above. Changes in interest income and interest expense that cannot be attributed to either volume or rate have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.

RATE AND VOLUME ANALYSIS

(in millions of dollars)

	For the Three Months Ended									For the Six Months Ended
	June 30, 2012 vs. 2011									June 30, 2012 vs. 2011
	Volume			Rate			Total			Volume			Rate			Total
Interest income
Interest-bearing deposits	$	—		$	—		$	—		$	—		$	—		$	—
Securities purchased under agreements to resell	1			—			1			2			—			2
Federal funds sold	—			—			—			(1		)	—			(1		)
Investments
Trading	—			—			—			—			—			—
Available-for-sale	8			—			8			16			—			16
Held-to-maturity	(6		)	3			(3		)	(11		)	2			(9		)
Advances	(5		)	(3		)	(8		)	(19		)	2			(17		)
Mortgage loans held for portfolio	—			—			—			(1		)	—			(1		)
Total interest income	(2		)	—			(2		)	(14		)	4			(10		)
Interest expense
Interest-bearing deposits	—			—			—			—			—			—
Consolidated obligations
Bonds	(9		)	2			(7		)	(24		)	10			(14		)
Discount notes	2			1			3			4			(1		)	3
Mandatorily redeemable capital stock and other borrowings	—			—			—			—			—			—
Total interest expense	(7		)	3			(4		)	(20		)	9			(11		)
Changes in net interest income	$	5		$	(3	)	$	2		$	6		$	(5	)	$	1

67

Other Income (Loss)

The following table presents the various components of other income (loss) for the three and six months ended June 30, 2012 and 2011. The significant components are discussed in the narrative following the table.

OTHER INCOME (LOSS)

(in thousands of dollars)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net interest income (expense) associated with:
Economic hedge derivatives related to consolidated obligation federal funds floater bonds	$	106		$	645		$	31		$	1,697
Economic hedge derivatives related to consolidated obligation discount notes	175			—			524			485
Stand-alone economic hedge derivatives (basis swaps)	2,647			818			5,353			1,022
Member/offsetting swaps	4			3			8			4
Economic hedge derivatives related to advances	(14		)	(31		)	(50		)	(105		)
Total net interest income associated with economic hedge derivatives	2,918			1,435			5,866			3,103
Gains (losses) related to economic hedge derivatives
Stand-alone derivatives (basis swaps)	1,489			(1,946		)	505			(5,855		)
Federal funds floater swaps	78			(716		)	2,258			(1,825		)
Interest rate caps related to held-to-maturity securities	(1,416		)	(6,780		)	(2,800		)	(11,106		)
Discount note swaps	(160		)	—			784			(497		)
Member/offsetting swaps and caps	7			7			2			102
Swaptions related to optional advance commitments	(1,234		)	(4,822		)	(1,734		)	(3,720		)
Other economic hedge derivatives (advance swaps and caps)	14			31			48			91
Total fair value losses related to economic hedge derivatives	(1,222		)	(14,226		)	(937		)	(22,810		)
Gains (losses) related to fair value hedge ineffectiveness
Advances and associated hedges	(372		)	(199		)	(556		)	204
Available-for-sale securities and associated hedges	(1,094		)	—			(416		)	—
Consolidated obligation bonds and associated hedges	(269		)	(1,068		)	(1,419		)	(1,070		)
Total fair value hedge ineffectiveness	(1,735		)	(1,267		)	(2,391		)	(866		)
Total net gains (losses) on derivatives and hedging activities	(39		)	(14,058		)	2,538			(20,573		)
Net gains (losses) on unhedged trading securities	(122		)	45			60			174
Credit component of other-than-temporary impairment losses on held-to-maturity securities	(146		)	(2,344		)	(360		)	(3,722		)
Unrealized gains on other liabilities carried at fair value under the fair value option (optional advance commitments)	1,223			4,994			2,365			4,133
Gains on early extinguishment of debt	—			46			—			415
Service fees	757			766			1,276			1,336
Letter of credit fees	1,170			1,345			2,399			2,774
Other, net	(193		)	18			(199		)	8
Total other	2,689			4,870			5,541			5,118
Total other income (loss)	$	2,650		$	(9,188	)	$	8,079		$	(15,455	)

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Economic Hedge Derivatives

The Bank has issued a number of consolidated obligation bonds that are indexed to the daily federal funds rate. The Bank uses federal funds floater swaps to convert its interest payments with respect to these bonds from the daily federal funds rate to three-month LIBOR. As of June 30, 2012, the Bank’s federal funds floater swaps had an aggregate notional amount of $0.7 billion. As economic hedge derivatives, the changes in the fair values of the federal funds floater swaps are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the consolidated obligation federal funds floater bonds) and therefore can be a source of volatility in the Bank’s earnings. The fair values of federal funds floater swaps generally fluctuate based on the timing of the interest rate reset dates, the relationship between the federal funds rate and three-month LIBOR at the time of measurement, the projected relationship between the federal funds rate and three-month LIBOR for the remaining term of the interest rate swap and the relationship between the current coupons for the interest rate swap and the prevailing market rates at the valuation date. At June 30, 2012, the carrying values of the Bank’s federal funds floater swaps totaled $0.5 million, excluding net accrued interest receivable.

From time to time, the Bank hedges some of its longer-term consolidated obligation discount notes using fixed-for-floating interest rate swaps. As stand-alone derivatives, the changes in the fair values of the Bank’s discount note swaps are recorded in earnings with no offsetting changes in the fair values of the hedged items (i.e., the consolidated obligation discount notes) and therefore can also be a source of volatility in the Bank’s earnings. The Bank did not have any discount note swaps outstanding as of June 30, 2012.

From time to time, the Bank also enters into interest rate basis swaps to reduce its exposure to changing spreads between one-month and three-month LIBOR. Under these agreements, the Bank generally receives three-month LIBOR and pays one-month LIBOR. As of June 30, 2012, the Bank was a party to 6 interest rate basis swaps with an aggregate notional amount of $4.7 billion. The Bank accounts for interest rate basis swaps as stand-alone derivatives and, as such, the fair value changes associated with these instruments can be a source of considerable volatility in the Bank’s earnings, particularly when one-month and/or three-month LIBOR, or the spreads between these two indices, are or are projected to be volatile. The fair values of one-month LIBOR to three-month LIBOR basis swaps generally fluctuate based on the timing of the interest rate reset dates, the relationship between one-month LIBOR and three-month LIBOR at the time of measurement, the projected relationship between one-month LIBOR and three-month LIBOR for the remaining term of the interest rate basis swap and the relationship between the current coupons for the interest rate swap and the prevailing LIBOR rates at the valuation date. At June 30, 2012, the carrying values of the Bank’s stand-alone interest rate basis swaps totaled $20.7 million, excluding net accrued interest receivable. There were no terminations of interest rate basis swaps during the six months ended June 30, 2012. During the six months ended June 30, 2011, one interest rate basis swap with a $1.0 billion notional balance matured. There were no other terminations of interest rate basis swaps during the six months ended June 30, 2011.

If the Bank holds its federal funds floater swaps and interest rate basis swaps to maturity, the cumulative life-to-date net unrealized gains associated with these instruments aggregating $21.2 million will ultimately reverse in future periods in the form of unrealized losses as the estimated fair values of these instruments decline to zero. The timing of this reversal will depend upon a number of factors including, but not limited to, the then-current and projected level and volatility of short-term interest rates over the lives of the derivatives. Occasionally, in response to changing balance sheet and market conditions, the Bank may terminate one or more interest rate basis swaps (or portions thereof) prior to their scheduled maturity. The Bank typically holds its federal funds floater swaps to maturity.

As discussed previously in the section entitled “Financial Condition — Long-Term Investments,” to hedge a portion of the risk associated with a significant increase in short-term interest rates, the Bank held (as of June 30, 2012) 16 interest rate cap agreements having a total notional amount of $3.9 billion. The premiums paid for these caps totaled $38.6 million. The fair values of interest rate cap agreements are dependent upon the level of interest rates, volatilities and remaining term to maturity. In general (assuming constant volatilities and no erosion in value attributable to the passage of time), interest rate caps will increase in value as market interest rates rise and will diminish in value as market interest rates decline. The value of interest rate caps will increase as volatilities increase and will decline as volatilities decrease. Absent changes in volatilities or interest rates, the value of interest rate caps will decline with the passage of time. As stand-alone derivatives, the changes in the fair values of the Bank’s interest rate cap agreements are recorded in earnings with no offsetting changes in the fair values of the hedged CMO LIBOR floaters with embedded caps and therefore can also be a source of considerable volatility in the Bank’s earnings.

At June 30, 2012, the carrying values of the Bank’s stand-alone interest rate cap agreements totaled $1.0 million. If the Bank holds these agreements to maturity, the value of the caps will ultimately decline to zero and be recorded as a loss in net gains (losses) on derivatives and hedging activities in future periods.

69

Hedge Ineffectiveness

The Bank uses interest rate swaps to hedge the risk of changes in the fair value of some of its advances and consolidated obligation bonds and substantially all of its available-for-sale securities. These hedging relationships are designated as fair value hedges. To the extent these relationships qualify for hedge accounting, changes in the fair values of both the derivative (the interest rate swap) and the hedged item (limited to changes attributable to the hedged risk) are recorded in earnings. For those relationships that qualified for hedge accounting, the differences between the change in fair value of the hedged items and the change in fair value of the associated interest rate swaps (representing hedge ineffectiveness) were net losses of $1.7 million and $1.3 million for the three months ended June 30, 2012 and 2011, respectively, and net losses of $2.4 million and $0.9 million for the six months ended June 30, 2012 and 2011, respectively. To the extent these hedging relationships do not qualify for hedge accounting, or cease to qualify because they are determined to be ineffective, only the change in fair value of the derivative is recorded in earnings (in this case, there is no offsetting change in fair value of the hedged item). During the three months ended June 30, 2012 and 2011, the net gains relating to derivatives associated with specific advances that were not in qualifying hedging relationships were $14,000 and $31,000, respectively. The net gains relating to these derivatives totaled $48,000 and $91,000 for the six months ended June 30, 2012 and 2011, respectively.

Other

For a discussion of the other-than-temporary impairment losses on two of the Bank’s held-to-maturity securities, see “Item 1. Financial Statements” (specifically, Note 4 beginning on page 11 of this report).

As of June 30, 2012, the Bank had entered into optional advance commitments with a par value totaling $160 million, excluding commitments to fund Community Investment Program and Economic Development Program advances. Under each of these commitments, the Bank sold an option to a member that provides the member with the right to enter into an advance at a specified fixed rate and term on a specified future date, provided the member has satisfied all of the customary requirements for such advance. The Bank hedged these commitments through the use of interest rate swaptions, which are treated as economic hedges. The Bank has irrevocably elected to carry these optional advance commitments at fair value under the fair value option.

During the first six months of 2011, market conditions were such from time to time that the Bank was able to extinguish certain consolidated obligation bonds and simultaneously terminate the associated interest rate swaps at net amounts that were profitable for the Bank, while new consolidated obligations could be issued and then converted (through the use of interest rate swaps) to a floating rate that approximated the cost of the extinguished debt including any associated interest rate swaps. As a result, during the three and six months ended June 30, 2011, the Bank repurchased $21.0 million and $283.8 million (par value) of its consolidated obligations in the secondary market and terminated the related interest rate swaps; the gains on these debt extinguishments totaled $14,000 and $383,000, respectively. In addition, during the three months ended June 30, 2011, the Bank transferred $15.0 million (par value) of its consolidated obligations to the FHLBank of San Francisco. A gain of $32,000 was recognized on the transfer. The Bank did not early extinguish or transfer any debt during the six months ended June 30, 2012.

Other Expense

Total other expense, which includes the Bank’s compensation and benefits, other operating expenses and its proportionate share of the costs of operating the Finance Agency and the Office of Finance, totaled $18.2 million and $37.3 million for the three and six months ended June 30, 2012, respectively, compared to $19.1 million and $39.3 million for the corresponding periods in 2011.

Compensation and benefits were $9.9 million and $21.4 million for the three and six months ended June 30, 2012, respectively, compared to $10.3 million and $21.9 million for the corresponding periods in 2011. The decreases of $0.4 million and $0.5 million, respectively, were due primarily to a small decrease in the costs associated with the Bank’s participation in the Pentegra Defined Benefit Plan for Financial Institutions, offset by cost-of-living and merit increases. At June 30, 2012, the Bank employed 203 people, an increase of 1 person from June 30, 2011.

Other operating expenses for the three and six months ended June 30, 2012 were $7.2 million and $13.5 million, respectively, compared to $7.0 million and $13.7 million, respectively, for the corresponding periods in 2011. The fluctuations were attributable to general increases and decreases in many of the Bank’s other operating expenses, none of which were individually significant.

The Bank, together with the other FHLBanks, is assessed for the cost of operating the Finance Agency and the Office of Finance. The Bank’s share of these expenses totaled $1.1 million and $2.5 million for the three and six months ended June 30, 2012, respectively, compared to $1.9 million and $3.8 million for the corresponding periods in 2011.

70

AHP and REFCORP Assessments

While the Bank is exempt from all federal, state and local taxation (except for real property taxes), it is obligated to set aside amounts for its Affordable Housing Program (“AHP”) and, through the second quarter of 2011, it was also obligated to contribute a portion of its earnings to the Resolution Funding Corporation ("REFCORP").

As required by statute, each year the Bank contributes 10 percent of its earnings (as adjusted for interest expense on mandatorily redeemable capital stock and, prior to the third quarter of 2011, after the REFCORP assessment discussed below) to its AHP. The AHP provides grants that members can use to support affordable housing projects in their communities. Generally, the Bank’s AHP assessment is derived by adding interest expense on mandatorily redeemable capital stock to income before assessments and then subtracting (in periods prior to the third quarter of 2011) the REFCORP assessment; the result of this calculation is then multiplied by 10 percent. For the three months ended June 30, 2012 and 2011, the Bank’s AHP assessments totaled $2.5 million and $0.7 million, respectively. The Bank’s AHP assessments totaled $5.2 million and $2.0 million for the six months ended June 30, 2012 and 2011, respectively.

Also as required by statute, each FHLBank was obligated through the second quarter of 2011 to contribute 20 percent of its reported earnings (after its AHP contribution) toward the payment of interest on REFCORP bonds that were issued to provide funding for the resolution of failed thrifts following the savings and loan crisis in the 1980s. The FHLBanks were required to pay these amounts to REFCORP until the aggregate amounts actually paid by all 12 FHLBanks were equivalent to a $300 million annual annuity whose final maturity date was April 15, 2030. On August 5, 2011, the Finance Agency certified that the payments made to REFCORP in July 2011 (which were derived from the FHLBanks’ earnings for the second quarter of 2011) were sufficient to fully satisfy the FHLBanks’ obligations to REFCORP. Accordingly, the Bank’s earnings for the six months ended June 30, 2012 were not reduced by a REFCORP assessment. During the three and six months ended June 30, 2011, the Bank charged $1.6 million and $4.5 million, respectively, of REFCORP assessments to earnings.

Critical Accounting Policies and Estimates

A discussion of the Bank’s critical accounting policies and the extent to which management uses judgment and estimates in applying those policies is provided in the Bank’s 2011 10-K. There were no substantial changes to the Bank’s critical accounting policies, or the extent to which management uses judgment and estimates in applying those policies, during the six months ended June 30, 2012.

The Bank evaluates its non-agency RMBS holdings for other-than-temporary impairment on a quarterly basis. The procedures used in this analysis, together with the results thereof as of June 30, 2012, are summarized in “Item 1. Financial Statements” (specifically, Note 4 beginning on page 11 of this report). In addition to evaluating its non-agency RMBS holdings under a base case (or best estimate) scenario, a cash flow analysis was also performed for each of these securities under a more stressful housing price scenario to determine the impact that such a change would have on the credit losses recorded in earnings at June 30, 2012. The results of that more stressful analysis are presented on page 54 of this report.

Liquidity and Capital Resources

In order to meet members’ credit needs and the Bank’s financial obligations, the Bank maintains a portfolio of money market instruments typically consisting of overnight federal funds issued by highly rated domestic banks. From time-to-time, the Bank also invests in reverse repurchase agreements, short-term commercial paper and U.S. Treasury Bills. Beyond those amounts that are required to meet members’ credit needs and its own obligations, the Bank typically holds additional balances of short-term investments that fluctuate as the Bank invests the proceeds of debt issued to replace maturing and called liabilities, as the balance of deposits changes, as the returns provided by short-term investments vary relative to the costs of the Bank’s discount notes, and as the level of liquidity needed to satisfy Finance Agency requirements changes. At June 30, 2012, the Bank’s short-term liquidity portfolio was comprised of $1.6 billion of overnight federal funds sold to domestic bank counterparties, $1.4 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas and a $1.0 billion overnight reverse repurchase agreement.

The Bank’s primary source of funds is the proceeds it receives from the issuance of consolidated obligation bonds and discount notes in the capital markets. Historically, the FHLBanks have issued debt throughout the business day in the form of discount notes and bonds with a wide variety of maturities and structures. Generally, the Bank has access to this market as needed during the business day to acquire funds to meet its needs.

In addition to the liquidity provided from the proceeds of the issuance of consolidated obligations, the Bank also maintains access to wholesale funding sources such as federal funds purchased and securities sold under agreements to repurchase (e.g., borrowings secured by its investments in MBS and/or agency debentures). Furthermore, the Bank has access to borrowings (typically short-term) from the other FHLBanks.

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The 12 FHLBanks and the Office of Finance are parties to the Federal Home Loan Banks P&I Funding and Contingency Plan Agreement (the “Contingency Agreement”). The Contingency Agreement and related procedures are designed to facilitate the timely funding of principal and interest payments on FHLBank System consolidated obligations in the event that a FHLBank is not able to meet its funding obligations in a timely manner. The Contingency Agreement and related procedures provide for the issuance of overnight consolidated obligations ("Plan COs") directly to one or more FHLBanks that provide funds to avoid a shortfall in the timely payment of principal and interest on any consolidated obligations for which another FHLBank is the primary obligor. The direct placement by a FHLBank of consolidated obligations with another FHLBank is permitted only in those instances when direct placement of consolidated obligations is necessary to ensure that sufficient funds are available to timely pay all principal and interest on FHLBank System consolidated obligations due on a particular day. Through the date of this report, no Plan COs have ever been issued pursuant to the terms of the Contingency Agreement.

On occasion, and as an alternative to issuing new debt, the Bank may assume the outstanding consolidated obligations for which other FHLBanks are the original primary obligors. This occurs in cases where the original primary obligor may have participated in a large consolidated obligation issue to an extent that exceeded its immediate funding needs in order to facilitate better market execution for the issue. The original primary obligor might then warehouse the funds until they were needed, or make the funds available to other FHLBanks. Transfers may also occur when the original primary obligor’s funding needs change, and that FHLBank offers to transfer debt that is no longer needed to other FHLBanks. Transferred debt is typically fixed rate, fixed term, non-callable debt, and may be in the form of discount notes or bonds.

The Bank participates in such transfers of funding from other FHLBanks when the transfer represents favorable pricing relative to a new issue of consolidated obligations with similar features. During the three months ended March 31, 2011, the Bank assumed consolidated obligations from the FHLBank of New York with par amounts totaling $150,000,000. The Bank did not assume any consolidated obligations from other FHLBanks during the three months ended June 30, 2011 or the six months ended June 30, 2012.

The Bank manages its liquidity to ensure that, at a minimum, it has sufficient funds to meet operational and contingent liquidity requirements. When measuring its liquidity for these purposes, the Bank includes only contractual cash flows and the amount of funds it estimates would be available in the event the Bank were to use securities held in its long-term investment portfolio as collateral for repurchase agreements. While it believes purchased federal funds might be available as a source of funds, it does not include this potential source of funds in its calculations of available liquidity.

The Bank’s operational liquidity requirement stipulates that it have sufficient funds to meet its obligations due on any given day plus an amount equal to the statistically estimated (at the 99-percent confidence level) cash and credit needs of its members and associates for one business day without accessing the capital markets for the sale of consolidated obligations. As of June 30, 2012, the Bank’s estimated operational liquidity requirement was $1.6 billion. At that date, the Bank estimated that its operational liquidity exceeded this requirement by approximately $10.5 billion.

The Bank’s contingent liquidity requirement further requires that it maintain adequate balance sheet liquidity and access to other funding sources should it be unable to issue consolidated obligations for five business days. The combination of funds available from these sources must be sufficient for the Bank to meet its obligations as they come due and the cash and credit needs of its members, with the potential needs of members statistically estimated at the 99-percent confidence level. As of June 30, 2012, the Bank’s estimated contingent liquidity requirement was $5.0 billion. At that date, the Bank estimated that its contingent liquidity exceeded this requirement by approximately $7.1 billion.

In addition to the liquidity measures described above, the Bank is required, pursuant to guidance issued by the Finance Agency, to meet two daily liquidity standards, each of which assumes that the Bank is unable to access the market for consolidated obligations during a prescribed period. The first standard requires the Bank to maintain sufficient funds to meet its obligations for 15 days under a scenario in which it is assumed that members do not renew any maturing, prepaid or called advances. The second standard requires the Bank to maintain sufficient funds to meet its obligations for 5 days under a scenario in which it is assumed that members renew all maturing and called advances, with certain exceptions for very large, highly rated members. These requirements are more stringent than the 5-day contingent liquidity requirement discussed above. The Bank was in compliance with both of these liquidity requirements at all times during the six months ended June 30, 2012.

The Bank’s access to the capital markets has never been interrupted to an extent that the Bank’s ability to meet its obligations was compromised and the Bank does not currently believe that its ability to issue consolidated obligations will be impeded to that extent in the future. If, however, the Bank were unable to issue consolidated obligations for an extended period of time, the Bank would eventually exhaust the availability of purchased federal funds (including borrowings from other FHLBanks) and repurchase agreements as sources of funds. It is also possible that an event (such as a natural disaster) that might impede the Bank’s ability to raise funds by issuing consolidated obligations would also limit the Bank’s ability to access the markets for federal funds purchased and/or repurchase agreements.

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Under those circumstances, to the extent that the balance of principal and interest that came due on the Bank’s debt obligations and the funds needed to pay its operating expenses exceeded the cash inflows from its interest-earning assets and proceeds from maturing assets, and if access to the market for consolidated obligations was not again available, the Bank would seek to access funding under the Contingency Agreement to repay any principal and interest due on its consolidated obligations. However, if the Bank were unable to raise funds by issuing consolidated obligations, it is likely that the other FHLBanks would have similar difficulties issuing debt. If funds were not available under the Contingency Agreement, the Bank’s ability to conduct its operations would be compromised even earlier than if this funding source was available.

A summary of the Bank’s contractual cash obligations and off-balance-sheet lending-related financial commitments by due date or remaining maturity as of December 31, 2011 is provided in the Bank’s 2011 10-K. There have been no material changes in the Bank’s contractual obligations outside the normal course of business during the six months ended June 30, 2012.

Recently Issued Accounting Guidance

For a discussion of recently issued accounting guidance, see “Item 1. Financial Statements” (specifically, Note 2 beginning on page 7 of this report).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following quantitative and qualitative disclosures about market risk should be read in conjunction with the quantitative and qualitative disclosures about market risk that are included in the Bank’s 2011 10-K. The information provided herein is intended to update the disclosures made in the Bank’s 2011 10-K.

As a financial intermediary, the Bank is subject to interest rate risk. Changes in the level of interest rates, the slope of the interest rate yield curve, and/or the relationships (or spreads) between interest yields for different instruments have an impact on the Bank’s estimated market value of equity and its net earnings. This risk arises from a variety of instruments that the Bank enters into on a regular basis in the normal course of its business.

The terms of member advances, investment securities, and consolidated obligations may present interest rate risk and/or embedded option risk. As discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Bank makes extensive use of interest rate derivative instruments, primarily interest rate swaps, swaptions and caps, to manage the risk arising from these sources.

The Bank has investments in residential mortgage-related assets, primarily CMOs and, to a much smaller extent, MPF mortgage loans, both of which present prepayment risk. This risk arises from the mortgagors’ option to prepay their mortgages, making the effective maturities of these mortgage-based assets relatively more sensitive to changes in interest rates and other factors that affect the mortgagors’ decisions to repay their mortgages as compared to other long-term investment securities that do not have prepayment features. Historically, a decline in interest rates has generally resulted in accelerated mortgage refinancing activity, thus increasing prepayments and thereby shortening the effective maturity of the mortgage-related assets. Conversely, rising rates generally slow prepayment activity and lengthen a mortgage-related asset’s effective maturity. Recent economic and credit market conditions appear to have had an impact on mortgage prepayment activity, as borrowers whose mortgage rates are above current market rates and who might otherwise refinance or repay their mortgages more rapidly may not be able to obtain new mortgage loans at current lower rates due to reductions in their incomes, declines in the values of their homes, tighter lending standards, a general lack of credit availability, and/or delays in obtaining approval of new loans.

Historically, the Bank has managed the potential prepayment risk embedded in mortgage assets by purchasing almost exclusively floating rate securities, by purchasing highly structured tranches of mortgage securities that substantially limit the effects of prepayment risk, and/or by using interest rate derivative instruments to offset prepayment risk specific both to particular securities and to the overall mortgage portfolio. Because the Bank generally purchases MBS with the intent and expectation of holding them to maturity, the Bank’s risk management activities related to these securities are focused on those interest rate factors that pose a risk to the Bank’s future earnings. As recent liquidity discounts in the prices for some of the Bank's non-agency RMBS holdings indicate, these interest rate related factors may not necessarily be the same factors that are driving the market prices of the securities.

The Bank’s Risk Management Policy provides a risk management framework for the financial management of the Bank consistent with the strategic principles outlined in its Strategic Business Plan. The Bank develops its funding and hedging strategies to manage its interest rate risk within the risk limits established in its Risk Management Policy.

The Risk Management Policy articulates the Bank’s tolerance for the amount of overall interest rate risk the Bank will assume by limiting the maximum estimated loss in market value of equity that the Bank would incur under simulated 200 basis point changes in interest rates to 15 percent of the estimated base case market value. As reflected in the table below, the Bank was in compliance with this limit at each month end during the six months ended June 30, 2012.

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As part of its ongoing risk management process, the Bank calculates an estimated market value of equity for a base case interest rate scenario and for interest rate scenarios that reflect parallel interest rate shocks. These calculations are made primarily for the purpose of analyzing and managing the Bank’s interest rate risk and, accordingly, have been designed for that purpose rather than for purposes of fair value disclosure under U.S. GAAP. The base case market value of equity is calculated by determining the estimated fair value of each instrument on the Bank’s balance sheet, and subtracting the estimated aggregate fair value of the Bank’s liabilities from the estimated aggregate fair value of the Bank’s assets. For purposes of these calculations, mandatorily redeemable capital stock is treated as equity rather than as a liability. The fair values of the Bank’s financial instruments (both assets and liabilities) are determined using vendor prices, dealer estimates or a pricing model. These calculations include values for MBS based on current estimated market prices, some of which reflect discounts that the Bank believes are largely related to credit concerns and a lack of market liquidity rather than the level of interest rates. For those instruments for which a pricing model is used, the calculations are based upon parameters derived from market conditions existing at the time of measurement, and are generally determined by discounting estimated future cash flows at the replacement (or similar) rate for new instruments of the same type with the same or very similar characteristics. The market value of equity calculations include non-financial assets and liabilities, such as premises and equipment, other assets, payables for AHP, and other liabilities at their recorded carrying amounts.

For purposes of compliance with the Bank’s Risk Management Policy limit on estimated losses in market value, market value of equity losses are defined as the estimated net sensitivity of the value of the Bank’s equity (the net value of its portfolio of assets, liabilities and interest rate derivatives) to 200 basis point parallel shifts in interest rates. The following table provides the Bank’s estimated base case market value of equity and its estimated market value of equity under up and down 200 basis point interest rate shock scenarios (and, for comparative purposes, its estimated market value of equity under up and down 100 basis point interest rate shock scenarios) for each month-end during the period from December 2011 through June2012. In addition, the table provides the percentage change in estimated market value of equity under each of these shock scenarios for the indicated periods.

MARKET VALUE OF EQUITY

(dollars in billions)

			Up 200 Basis Points(1)			Down 200 Basis Points(2)			Up 100 Basis Points(1)			Down 100 Basis Points(2)
	Base Case Market Value of Equity		Estimated Market Value of Equity		Percentage Change from Base Case	Estimated Market Value of Equity		Percentage Change from Base Case	Estimated Market Value of Equity		Percentage Change from Base Case	Estimated Market Value of Equity		Percentage Change from Base Case
December 2011	$	1.888	$	1.791	(5.14)%	$	1.977	4.71%	$	1.849	(2.07)%	$	1.935	2.49%
January 2012	1.788		1.714		(4.14)%	1.870		4.59%	1.761		(1.51)%	1.836		2.68%
February 2012	1.871		1.770		(5.40)%	1.957		4.60%	1.830		(2.19)%	1.918		2.51%
March 2012	1.901		1.793		(5.68)%	1.989		4.63%	1.858		(2.26)%	1.947		2.42%
April 2012	1.740		1.658		(4.71)%	1.819		4.54%	1.707		(1.90)%	1.784		2.53%
May 2012	1.846		1.788		(3.14)%	1.906		3.25%	1.822		(1.30)%	1.886		2.17%
June 2012	1.890		1.822		(3.60)%	1.950		3.17%	1.860		(1.59)%	1.929		2.06%

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⁽¹⁾  In the up 100 and 200 scenarios, the estimated market value of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.

⁽²⁾  Pursuant to guidance issued by the Finance Agency, the estimated market value of equity is calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates, subject to a floor of 0.35 percent.

A related measure of interest rate risk is duration of equity. Duration is the weighted average maturity (typically measured in months or years) of an instrument’s cash flows, weighted by the present value of those cash flows. As such, duration provides an estimate of an instrument’s sensitivity to small changes in market interest rates. The duration of assets is generally expressed as a positive figure, while the duration of liabilities is generally expressed as a negative number. The change in value of a specific instrument for given changes in interest rates will generally vary in inverse proportion to the instrument’s duration. As market interest rates decline, instruments with a positive duration are expected to increase in value, while instruments with a negative duration are expected to decrease in value. Conversely, as interest rates rise, instruments with a positive duration are expected to decline in value, while instruments with a negative duration are expected to increase in value.

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The values of instruments having relatively longer (or higher) durations are more sensitive to a given interest rate movement than instruments having shorter durations; that is, risk increases as the absolute value of duration lengthens. For instance, the value of an instrument with a duration of three years will theoretically change by three percent for every one percentage point change in interest rates, while the value of an instrument with a duration of five years will theoretically change by five percent for every one percentage point change in interest rates.

The duration of individual instruments may be easily combined to determine the duration of a portfolio of assets or liabilities by calculating a weighted average duration of the instruments in the portfolio. These combinations provide a single straightforward metric that describes the portfolio’s sensitivity to interest rate movements. These additive properties can be applied to the assets and liabilities on the Bank’s balance sheet. The difference between the combined durations of the Bank’s assets and the combined durations of its liabilities is sometimes referred to as duration gap and provides a measure of the relative interest rate sensitivities of the Bank’s assets and liabilities.

Duration gap is a useful measure of interest rate sensitivity but does not account for the effect of leverage, or the effect of the absolute duration of the Bank’s assets and liabilities, on the sensitivity of its estimated market value of equity to changes in interest rates. The inclusion of these factors results in a measure of the sensitivity of the value of the Bank’s equity to changes in market interest rates referred to as the duration of equity. Duration of equity is the market value weighted duration of assets minus the market value weighted duration of liabilities divided by the market value of equity.

The significance of an entity’s duration of equity is that it can be used to describe the sensitivity of the entity’s market value of equity to movements in interest rates. A duration of equity equal to zero would mean, within a narrow range of interest rate movements, that the Bank had neutralized the impact of changes in interest rates on the market value of its equity.

A positive duration of equity would mean, within a narrow range of interest rate movements, that for each one year of duration the estimated market value of the Bank’s equity would be expected to decline by about 0.01 percent for every positive 0.01 percent change in the level of interest rates. A positive duration generally indicates that the value of the Bank’s assets is more sensitive to changes in interest rates than the value of its liabilities (i.e., that the duration of its assets is greater than the duration of its liabilities).

Conversely, a negative duration of equity would mean, within a narrow range of interest rate movements, that for each one year of negative duration the estimated market value of the Bank’s equity would be expected to increase by about 0.01 percent for every positive 0.01 percent change in the level of interest rates. A negative duration generally indicates that the value of the Bank’s liabilities is more sensitive to changes in interest rates than the value of its assets (i.e., that the duration of its liabilities is greater than the duration of its assets).

The following table provides information regarding the Bank’s base case duration of equity as well as its duration of equity in up and down 100 and 200 basis point interest rate shock scenarios for each month-end during the period from December 2011 through June2012.

DURATION ANALYSIS

(expressed in years)

	Base Case Interest Rates				Duration of Equity
	Asset Duration	Liability Duration	Duration Gap	Duration of Equity	Up 100(1)	Up 200(1)	Down 100(2)	Down 200(2)
December 2011	0.59	(0.55)	0.04	1.20	2.65	3.83	4.71	4.71
January 2012	0.58	(0.48)	0.10	2.12	2.19	3.43	4.54	4.47
February 2012	0.57	(0.47)	0.10	1.92	2.88	4.07	4.85	4.78
March 2012	0.55	(0.47)	0.08	1.82	3.06	4.27	4.54	4.58
April 2012	0.52	(0.44)	0.08	1.93	2.44	3.63	4.80	4.74
May 2012	0.47	(0.41)	0.06	1.50	1.54	2.43	4.20	4.15
June 2012	0.49	(0.41)	0.08	1.74	1.79	2.57	4.01	3.99

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⁽¹⁾  In the up 100 and 200 scenarios, the duration of equity is calculated under assumed instantaneous +100 and +200 basis point parallel shifts in interest rates.

⁽²⁾  Pursuant to guidance issued by the Finance Agency, the duration of equity was calculated under assumed instantaneous -100 and -200 basis point parallel shifts in interest rates, subject to a floor of 0.35 percent.

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Duration of equity measures the impact of a parallel shift in interest rates on an entity’s market value of equity but may not be a good metric for measuring changes in value related to non-parallel rate shifts. An alternative measure for that purpose uses key rate durations, which measure portfolio sensitivity to changes in interest rates at particular points on a yield curve. Key rate duration is a specialized form of duration. It is calculated by estimating the change in value due to changing the market rate for one specific maturity point on the yield curve while holding all other variables constant. The sum of the key rate durations across an applicable yield curve is approximately equal to the overall portfolio duration.

The duration of equity measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates. The key rate duration measure represents the expected percentage change in the Bank’s market value of equity for a one percentage point (100 basis point) parallel change in interest rates for a given maturity point on the yield curve, holding all other rates constant. The Bank has established a key rate duration limit of 7.5 years, measured as the difference between the maximum and minimum key rate durations calculated for nine defined individual maturity points on the yield curve. The Bank calculates these metrics monthly and was in compliance with these policy limits at each month-end during the first six months of 2012.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Bank’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Bank’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Bank’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Bank’s disclosure controls and procedures were effective in: (1) recording, processing, summarizing and reporting information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act within the time periods specified in the SEC’s rules and forms and (2) ensuring that information required to be disclosed by the Bank in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Bank’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes in the Bank’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

31.1	Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from the Bank’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2012, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Statements of Condition as of June 30, 2012 and December 31, 2011, (ii) Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011, (iii) Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011, (iv) Statements of Capital for the Six Months Ended June 30, 2012 and 2011, (v) Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011, and (vi) Notes to the Financial Statements for the quarter ended June 30, 2012.
	Pursuant to Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 attached hereto is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Federal Home Loan Bank of Dallas
August 10, 2012	By	/s/ Michael Sims
Date		Michael Sims
		Chief Operating Officer, Executive Vice President — Finance and Chief Financial Officer (Principal Financial Officer)
August 10, 2012	By	/s/ Tom Lewis
Date		Tom Lewis
		Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

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EXHIBIT INDEX

31.1	Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from the Bank’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2012, formatted in eXtensible Business Reporting Language (“XBRL”): (i) Statements of Condition as of June 30, 2012 and December 31, 2011, (ii) Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011, (iii) Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011, (iv) Statements of Capital for the Six Months Ended June 30, 2012 and 2011, (v) Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011, and (vi) Notes to the Financial Statements for the quarter ended June 30, 2012.
	Pursuant to Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 attached hereto is being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.